Growth in longevity reinsurance and longevity risk transfer business could help life reinsurers to elevate their returns on equity (ROE) above 10%, but at the same time there is an expectation that growing demand for longevity capacity will change reinsurers risk profiles, according to S&P.
Rating agency Standard & Poor’s expects the demand for longevity reinsurance capacity, both in stand-alone form and to back pension risk transfer arrangements such as longevity swaps, to increase providing an opportunity for the life reinsurance market at a time when there has been some stagnation of growth in traditional markets and emerging markets are only growing very slowly.
S&P says in a new report on the life reinsurance sector that it sees “potential in the longevity and morbidity lines of business.”
Future expected growth in longevity reinsurance and risk transfer is expected to help the life reinsurance sectors profitability prospects as well, S&P explains. The rating agency anticipates that longevity business would generate a similar return compared to the historical business mix in the industry.
S&P expects to see growth in gross life reinsurance premiums written of about 3%-5% globally in 2016-2017, with longevity reinsurance demand helping to contribute to some of that increase.
However, this growth will deserve greater risk management and underwriting control from reinsurance firms, with any increase in longevity likely to change the typical life reinsurer portfolio mix.
“The U.K. longevity business is a strong example of the industry’s business potential. In 2014 and 2015, there was a significant increase in longevity swap transfer deals from pension funds and corporates that transferred their longevity risks to external parties.
“The global life reinsurance players have participated significantly in these deals, and have demonstrated their ability and willingness to leverage these mainly regulation-driven business opportunities,” S&P explains in its report.
While the majority of the longevity risk transfer, longevity swap and resulting longevity reinsurance business has emanated from the UK, S&P expects that to expand globally.
“We observe increasing demand from longevity deals also in The Netherlands and the U.S., creating further business potential,” the rating agency says.
And Solvency II is a key driver for longevity reinsurance demand, as we’ve written before here at Artemis, with an expectation that life insurers will increasingly look to use more reinsurance capacity to help them meet capital requirements.
“Although the magnitude is not yet clear, for 2016 and 2017 we expect generally positive business potential arising from Solvency II for the global life reinsurance industry in view of further optimization of the primary insurance portfolios and the need for capital to balance increasing risk-based capital requirements for interest rate-sensitive savings products,” S&P states.
The change in portfolio mix could result in some changes to life reinsurers capital requirements though, S&P warns, with the growth into longevity business possibly a driver of some adjustments to their capital models.
“The potential growth in longevity and morbidity is also adding further new risks for the industry, and longevity risk is not always diversifiable from mortality business in the regions,” S&P warns. “This could change the risk profile of the industry gradually and potentially increase capital requirements, in our view.”
As a result of the growth potential in life reinsurance, thanks to new and growing opportunities such as longevity risk, S&P expects the returns of life reinsurers will outpace property and casualty specialists.
“The profitability outlook remains strong, with a return on equity potential of above just 10%, outperforming global property & casualty reinsurance, which is more in the 7%-9% range,” S&P explained.
As life reinsurance delivers higher returns than P&C risks it could also generate increasing interest from the capital markets, as ILS funds and investors see life reinsurance as a valuable addition to their portfolios that could boost returns.
ILS and capital market players do participate here, but to date reinsurance firms have been able to compete strongly to minimise the amount of life business lost to collateralised markets.
One interesting possibility is that as life reinsurance companies look for new growth opportunities, in longevity, morbidity or emerging markets, any increase in their capital requirements could work in the favour of the ILS markets, helping to increase demand for retrocession and perhaps stimulating some more deal-flow in mortality catastrophe bonds and the like.
View details of many historical longevity swap and reinsurance transactions in our Longevity Risk Deal Directory.
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