The prime of life

Intelligent Insurer investigates the conditions that allowed these companies to develop and the opportunities they present to reinsurers.

There are a number of ways for a life insurer to become a global success. Some have built their global presence steadily, over many years of carefully considered strategic and organic expansion. Others, such as Aviva, have grown mainly through joint ventures. And then there are those companies that found themselves quickly propelled to global status thanks to a frantic period of mergers and acquisitions around 10 to 20 years ago.

“A good example of this is Allianz, which built up a significant operation inside Germany and then began to acquire companies outside of the country,” says Vasilis Katsipis, general manager of rating agency A.M. Best.

“Prudential followed the same formula, growing to become a major player in the UK life insurance market over the course of a century. It then began to branch out globally, through the acquisition of companies such as Jackson National Life Insurance in the US.”

But whilst M&A activity has been a major driver in growth over the past decade for life insurers, market conditions—along with regulatory changes—have made it a less attractive option for the foreseeable future.

“Companies may continue with this strategy opportunistically, but I do not believe that there will be a major drive for mergers and acquisitions activity in the next two to three years,” says Katsipis.

“One major uncertainty is around what the Solvency II capital requirements will be—European insurers are likely to want to know what that level will be before they begin engaging in mergers and acquisitions again. However, there may be some activity from the large US life insurers, as we’ve seen recently with MetLife acquiring the international business of AIG.”

This means that, generally, all companies are trying to be more capital efficient and focused on their core business.

“Whether that means acquiring or disposing of something would depend on their own particular circumstances,” says Carlos Wong-Fupuy, senior director at A.M. Best.

“Therefore mergers and acquisitions activity cannot be ruled out—however, the capital markets are not in a condition to facilitate any big transactions.”

Capital is certainly an issue—while there has been some recovery in the past year in terms of investment income, there are still a few companies that are suffering from credit exposure impairments.

“Others are still making adjustments, along with others with considerable provisions for potential investment impairments, and they are still keeping those in place,” says Wong-Fupuy.

“The investment side of the technical account stabilised to a certain extent, but at a lower level compared to what it used to be in the past. this is why life insurers have to be more careful when they try to develop new products and focus on capital efficiency.”

This focus on capital efficiency is especially important given the current economic climate, with many markets still experiencing uncertainty.

“In terms of market conditions, one needs to first consider some of the economic indicators and with most of them, economies around the world are not showing the growth rates which were observed between 2002- 2008,” says Katsipis.

“The investment side of the technical account stabilised to a certain extent, but at a lower level compared to what it used to be in the past. This is why life insurers have to be more careful when they try to develop new products and focus on capital efficiency.”

“That means that, generally, demand for life insurance products is going to be sluggish. on the other hand, the demand for retirement products is now seen to be growing significantly—overall, we are seeing consumers valuing products which can provide them with some guarantees on their investments.” There are a number of reasons for the growth in popularity of these products.

“The first reason is demographic, as the large ‘baby boomer’ generation across most of Europe is now approaching retirement,” says David Prowse, senior director of insurance at Fitch Ratings.

“The second reason is economic: low interest rates and increasing longevity have reduced the amount of pension that a given pot of savings can buy—a problem for people approaching retirement in countries where pensions savings must be largely converted into annuities, most notably the UK.

“These people are looking for alternatives to boost their potential income during retirement, including income drawdown and potentially ‘variable annuity’ products somewhat along the lines of US-style variable annuities, which are a major retirement product in the US. these alternatives offer the possibility of higher returns and greater flexibility for customers, albeit with some extra risks.”

Along with changes in demand, life insurers have to negotiate other issues, such as mortality risk, which is not entirely predictable and can be quite volatile within a small portfolio. this can also open up opportunities for reinsurers to provide assistance.

“That uncertainty is a challenge for life insurers—clearly for pricing, but also in terms of the capital they must hold to reflect the uncertainty,” says Prowse.

“Reinsurers can help because they pool mortality/longevity risk across many insurers, which means they are less exposed to volatility. Reinsurance can smooth out some of the volatility that life insurers are exposed to. it can also significantly reduce their capital requirements. One other way in which reinsurers can help life insurers is by providing expertise—using their much wider experience and data on mortality/longevity experience to assist life insurers with underwriting and pricing,” Prowse says.

The issuing of pricing is a big challenge, according to Dr Joachim wenning, board member of munich re with the responsibility for life reinsurance.

“Calculating mortality risk on a population basis is no difficult exercise,” he says. “however, life insurers do not insure whole populations, but only a small share of each. how will you get the pricing right here? The challenge is to target specific client segments through specialised sales channels.

“In addition to this, life insurers have to develop and apply appropriate underwriting rules and offer tailor-made products that contribute to the necessary risk selection and risk-differentiated pricing. Being too conservative means that you will not accomplish your growth targets, not being it may create an earnings issue. the challenge is to get the balance right.”

Overall, as the life insurance landscape continues to change, it continues to present opportunities for reinsurers to support insurers, through capital and risk management solutions, argues Brendan Galligan, executive vice president and head of business development, global markets, at RGA Reinsurance Company.

“These changes affect both global and local insurers, though their impacts may be different to each,” he says. “Regulatory changes such as Solvency II create opportunities for reinsurers to support insurers’ changing capital requirements. The evolution of newer distribution channels, such as bancassurance and direct marketing, present interesting opportunities.”

Despite the challenges that life insurers face, including an ever-changing economic and demographic landscape, many still are growing relentlessly, especially in emerging markets. therefore, it seems reasonable to say that they will continue to present reinsurers with a number of opportunities for a long time to come.