Conditions in the life reinsurance market may begin to favour more participation from alternative capital and insurance-linked securities (ILS) managers and funds, as the consolidated market heightens concerns about counterparty concentration.
In recent years the life reinsurance market has been dominated by a few very large global reinsurance players and a few large life insurance and reinsurance specialists. However the issues of counterparty concentration that this brings could result in more opportunities for ILS capital to assume life mortality risks in the future.
In a report on the U.S. life reinsurance market rating agency A.M. Best presents a scene of a stable market, but a few of the points made suggest that the market, which has been more difficult for ILS to penetrate compared to property catastrophe reinsurance, could begin to favour more participation from ILS managers with collateralized life reinsurance products.
Life insurance and reinsurance risks have always been part of the ILS market, but in recent years it has not been an area that has seen the rapid growth that catastrophe and weather exposures have seen.
Part of the reason for that is the lower rates achievable in many life reinsurance transactions, making life more of a diversifier for some ILS managers. But the main reason life risks haven’t been as prevalent in ILS, or indeed in the catastrophe bond market, is the ability of large, global reinsurance firms to offer incredibly keen pricing as they use life risks as a diversifier for their property and casualty portfolios.
With life reinsurance seeing slow organic growth, in terms of market size, some higher retentions and the competition coming from the world’s largest reinsurers, it has not proved an easy sector for ILS. Some ILS fund managers have established life insurance and reinsurance funds and portfolios, but have become very selective, and experienced at selecting, in the types of deals invested in.
In its report, A.M. Best notes that; “Ongoing consolidation in the U.S. life reinsurance arena has resulted in a market dominated by a few large players, and the completed acquisitions over the past several years have more clearly segmented the market into larger versus smaller players.”
With the top five reinsurers now accounting for more than four-fifths of total life reinsurance volume, A.M. Best says that it does not expect further consolidation to affect the market.
While that suggests stability in life reinsurance, it also raises the prospects of counterparty concentration risk, especially for the larger direct writers of life insurance.
It is this risk of not being able to spread your reinsurance program across a wide enough set of markets that could stimulate an increased demand for ILS capacity to back life reinsurance risks, possibly even stimulating an increased interest in mortality catastrophe bonds or embedded value life insurance securitisations.
A.M. Best notes that there are significant barriers to entry in life reinsurance, due to market dynamics. But some of the more established ILS managers that underwrite life risks on a collateralised basis have significant experience in the space and may find that they can offer solutions to life insurers that can help them to overcome the competition.
However, perhaps countering the potential for additional interest, is the fact that investors and alternative sources of capital have been focused on the area of life business where whole blocks or books of business are transferred and acquired.
A.M. Best notes that this is an area where mid-sized life re/insurers have focused historically and that if alternative capital is taking that business, these players could focus more on traditional reinsurance of life business, once again increasing competition.
But still the need for diversity within life reinsurance panels could become a driver for increasing participation from the ILS fund sector, either through insurers using the catastrophe bond structure to transfer their peak mortality risks, or ILS fund managers participating in their renewals on a fully collateralised basis.
Concentration is a risk for insurers, who would prefer to source their reinsurance from a diverse range of counterparties. The ILS market could likely help to reduce counterparty concentration risk, if the pricing and terms can be made comparable to the traditional life reinsurance product.