Alternative capital competition to offset life reinsurance hardening: Deloitte

Alternative sources of reinsurance capital and their appetite to access diversified sources of insurance and reinsurance risk, including life risks, are expected to offset the price hardening effects of consolidation in the life reinsurance sector, according to Deloitte.

A new report from Deloitte looks at the use of reinsurance capital, how that has changed and concludes that reinsurance remains core to capital management in the global re/insurance sector, although how it is used is forecast to continue to change in response to market forces.

As well as transferring risk, reinsurance helps buyers to manage and maintain the competitiveness of their bottom-line, while also better controlling earnings volatility.

In life reinsurance, the sector that has been beset by heavy competition from traditional reinsurance sources, which to-date has actually hindered the growth of alternative capital and insurance-linked securities (ILS) exposed to life risks such as mortality and longevity.

Traditional reinsurer appetite to consume life risks, as a key diversifying component of the strategy for major global players, has meant that pricing has been low for some years and made securitization less attractive than traditional capacity in many cases.

The result has been a slow-down in the life ILS space, as many deals went traditional. As well as a gradual shift to private life ILS deals, where the terms and pricing can be made more competitive through efficiency.

However, Deloitte notes in its report that recently, a “significant consolidation in the life reinsurance industry has led to a hardening of prices from a buyer’s perspective,” a trend that has been particularly prevalent in U.S. and Bermuda.

This comes at a time when demand for life reinsurance is actually expected to increase though, as regulatory uncertainty, increased awareness of mortality trends and sensitivity to policyholder behaviour all stimulate greater desire for reinsurance and retrocessional protection.

But demand alone is rarely enough to temper price hardening in reinsurance and according to Deloitte it looks like alternative capital may be the tempering factor for life reinsurance prices this time around, in a similar way to how it has tempered price rises in property and catastrophe risks.

The trend towards harder prices in the life reinsurance market is expected to be “offset by increased price competition from alternative capital sources,” Deloitte explains.

As ILS funds and other alternative capital providers look for further diversification opportunities and new strategic angles to attack, the life insurance and reinsurance market is likely to become an increasing focus.

This will bring greater capital market participation in life risks and could also stimulate some of the reinsurance firms to look at how they can bring third-party capital into their life risk underwriting operations as well.

To-date little life risk is ceded to investors through structures such as collateralized reinsurance sidecars, but in future this could change and as price competition continues the efficiency of the capital markets is set to become increasingly influential in life risk.

Join Artemis in Singapore on July 13th 2017 for ILS Asia, tickets on sale here