Solvency II driving life reinsurance but not life ILS (yet)

According to the results of a survey released today more life insurance companies are buying reinsurance protection, with Solvency II suspected a key driver of sales, but it has not yet resulted in increased issuance of life insurance-linked securities (ILS) or mortality catastrophe bonds.

The survey from reinsurance broker Aon Benfield is based on responses from 290 life insurers across 17 countries, or groups of countries, between them buying a combined catastrophe reinsurance capacity of €7.5 billion in terms of XL per-event treaties. The geographical scope of Aon’s study is focused on Europe but also includes Canada, China, Israel and Japan, representing a diverse cross-section of the markets participants.

The survey found that 83% of companies questioned are buying life catastrophe reinsurance protection, up from 78% in 2011. The amount of capacity purchased for XL per-event cover has increased in Europe by 17% from 2010 to 2013, now reaching €6.6 billion.

Anne-Lise Bagur, actuary at Aon Benfield Analytics, commented; “Our study shows that the current capacity in XL per-event cover equates to at EUR 6.6 billion in Europe – an increase of 17% since we started the study four years ago. This figure also reflects how the number of companies not taking out reinsurance has decreased from 22% in 2011 to 17% in 2013. We believe Solvency II is the main driver of the increase in reinsurance purchase in Europe, as companies prepare for the forthcoming regulation by buying reinsurance to reduce capital requirements.”

Around 90% of the life catastrophe protections involved are XL per-event treaties, a percentage that has been consistent since 2010. In terms of the types of covers, whether XL per-event, XL per-risk and per-event or another structure, there is little difference in the distribution between European and non-European countries.

Aon Benfield Analytics notes that it has not, to date, observed any substantial take-up of new or alternative structures from the insurance-linked securities market, such as extreme mortality catastrophe bonds, penetrating the market for reinsurance protection for life insurers.

Marc Beckers, Head of Aon Benfield Analytics EMEA, explained to Artemis; “What we observe so far is that reinsurers, who often have an excess of mortality or pandemic risk on their books, can tap the capital markets successfully through structures such as mortality catastrophe bonds. However for insurers, who this survey consists of, there is still ample capacity in the traditional reinsurance market which will take their accidental death risk on a proportional basis for a reasonable price, as well as which it is not yet cost-efficient for insurers to access the capital markets for life ILS.”

While life insurers are not yet themselves accessing the capital markets through ILS, the increased life catastrophe reinsurance capacity they are buying will inevitably result in further transferral of this risk to the ILS and alternative capital markets by reinsurers. Solvency II will drive increases in both reinsurance use and capital markets risk transfer and life insurers (and reinsurers) will continue to find it a useful mechanism to reduce their capital requirements.

You can access the full report on the survey via the Aon Benfield website here.