Life Re Market Stable, But Changing: Rating Agencies

Several years ago, reinsurers did make a foray into reinsuring products with guarantees, experienced losses and stopped reinsuring these risks for a time.

But, Robinson maintains that a "more robust analysis" of the risks in these products is making it possible to "craft treaties" and reinsure more of these features.

There are more defined limits on what is reinsured such as establishing maximum loss provisions, according to Bazer.

Bazer says that another area that will supplement revenues going forward is admin re business which allows companies to sell blocks of business that are no longer a business fit. Reinsurers are equipped to assume such business because of the data that they have access to ensure that they are correctly pricing such business, she says.

Long term care insurance is one product that reinsurers could conceivably focus on if they price it right and use the correct treaty design, according to Robinson.

Moody's Bazer also says that another part of the life reinsurance market where there is growth is an increase in the number of captives. The increase, she continues, is largely due to the need to reinsure level term and universal life products that come under the auspices of Triple-X and A-Triple-X regulatory requirements.

These types of products, according to the Moody's report reflect the move of reinsurers to use capital markets to manage exposures and balance sheets. Most of the capital market activity, according to the report, has been in the area of Triple-X non-recourse financing. Under such a transaction, according to the report, risk and reserves are transferred to a wholly owned captive reinsurer. The captive, the report continues, "uses a trust structure to fund itself in the capital markets and to collateralize the incremental reserve requirements of the sponsor. The capital markets debt is serviced by investment income on trust assets and does not have recourse to the sponsor."

In a recent report released by Fitch Ratings, the rating agency said that the global outlook for both life and non-life reinsurance is stable. For life reinsurers, the report continues, even with significant declines in cession rates in 2006, underlying demand persists because "primary insurance and annuity providers continue to use reinsurance to manage capital and mortality risk."

Life reinsurers, according to the agency, are more stable than non-life reinsurers because life reinsurers are concentrated among a small number of players which are largely small parts of larger organizations. Because life reinsurance contracts are long-term in nature, the life industry is also more stable, Fitch continues.

Fitch says that life reinsurers biggest near-term challenge is balancing their need to generate returns on capital with the current low interest rate environment.