How Well Capitalized Are The Unlockers of Capital?

In general, reinsurers assume lower mortality costs than direct writers because the blocks of business they reinsure are more diversified in terms of size, underwriting class and geographic region, Colligan continues.

Capital reserving can be quite enormous and although there may be a few large securitizations to ease that burden, overall, the cost of reinsurance is still cheaper, Graham Bancroft, senior vice president-reinsurance with Clarica Life Insurance Company, Toronto, concurs.

Not only are reinsurers easing financial requirements by assuming mortality risks, but they are also helping to more accurately pinpoint those risks, says Arnold Dicke, senior vice president and chief actuary with ING Re, Denver.

The more accurately you can pinpoint mortality, the lower the economic capital requirements, he adds.

And by assuming mortality risk, reinsurers are allowing direct writers to lock into mortality costs and smooth the volatility of returns they earn on capital, says Kurt Hagelman, senior vice president and chief marketing officer, Hannover Life Re, Orlando, Fla. Financial reinsurance is still the cheapest way to accomplish this, he adds.

As ratings become increasingly important, direct writers will look to reinsurers to help free up capital, Hagelman continues.

Rating agency analysts offered their own takes on how reinsurance figures into todays life insurance market.

With consolidation among reinsurers, there is a shift of capital with a greater weighting of capital concentrated in fewer companies, says Julie Burke, a managing director with Fitch Ratings, Chicago.

That consolidation, which has really become evident in the last five years, is resulting in a concentration of capital but since reinsurers are diversified by different product lines, capital deployed is being diversified, says Robert Riegel, managing director-U.S. Life & Health Insurance with Moodys Investors Service, New York.

The concentration of capital in the reinsurance business will be among about a half dozen competitors over the next few years, says Rodney Clark, director-financial services ratings, Standard & Poors Corp., New York.

That concentration of capital may make it more difficult for companies based in Bermuda to continue to offer a cost advantage realized through tax advantages over reinsurers with operations in the United States, he adds.

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 7, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.