High profile investor Warren Buffett’s reinsurance firm Berkshire Hathaway Inc. has entered into another large reinsurance transaction in the life & health sector. Berkshire Hathaway will reinsure $923m (€700m) of healthcare related claims for Irish state health insurer VHI.
Over the last year Berkshire has been steadily assuming life and longevity risks through a number of large transactions. For Buffett these large deals pay big premiums which the investor can put to work within his various portfolios. For the counterparties in these transactions, they get the backing of Berkshire Hathaway, the largest source of reinsurance capital around, and offload risks associated with future liabilities in many of the deals.
Back in November 2012 Berkshire Hathaway entered into a reinsurance agreement with Spanish insurance company VidaCaixa, Sociedad Anónima de Seguros y Reaseguros which saw it effectively bet on the future values of a portfolio of life insurance policies. Then in February of this year in a reinsurance deal worth $2.2 billion, Berkshire Hathaway reinsured risks associated with $4 billion of future claims for two of health insurer Cigna Corp’s run-off variable annuity businesses. Of course Buffett has also partnered with Aon to provide Berkshire Hathaway capacity to the Lloyd’s market in a sometimes controversial full-follow sidecar type facility at the reinsurance market.
The deal with VHI is for one year and will see Berkshire Hathaway cover half of the claims on VHI’s €1.4 billion book of health insurance business. For VHI this deal comes at an opportune time when it has been under pressure over rising claims costs and the burden it has placed on Irish taxpayers.
VHI estimates that the deal with Berkshire Hathaway will save Irish taxpayers as much as €90m. VHI said in a statement that it would seek to extend the arrangement with Berkshire Hathaway in the future and would look for multi-year protection for its health insurance claims costs from Buffett’s reinsurer.
VHI has seen an increase in claims costs as longevity ages its policy base. Customers under the age of 60 have shrunk by 29% while those older than 60 have risen by 12%, according to Bloomberg’s article on this deal. This trend is likely set to continue, as younger Irish residents look to private healthcare and older residents increase in number through longevity trends.
This longevity risk can impact health insurers who have to prepare to pay claims for an aging populace which may put greater burden on its resources. Aging customers will likely make more claims and for longer than previously estimated, meaning health insurers can face future shortfalls.
By offloading half of its claims to Berkshire Hathaway, VHI has secured a good portion of those claims costs. However, a one year deal does not combat the longevity risk in the portfolio and VHI will be keen to either fully offload certain policies or to turn this reinsurance agreement into a multi-year contract.
For Berkshire Hathaway, taking on these kinds of risks is standard business practice, the reinsurer is known for taking on difficult or unwanted life and health insurance portfolios. It can add to the reinsurers longevity exposure a little, although not as a one year agreement, but for Buffett the premium income as an investment asset is worth more than the expected losses on the portfolio we imagine.