Despite ongoing challenges created by low interest rates, lower returns and an increasingly complex regulatory environment, several leading life reinsurers have experienced growth over the past few years. Factors expected to drive growth in life reinsurance include: an aging population in mature markets, progressive urbanization, ongoing formation of a stable middle class, and changing socio-demographics in emerging markets.
For more than a decade, market consolidation and declining growth rates defined the global life reinsurance sector, but these market conditions may have finally run their course. Cession rates for mortality lines, which had been shrinking in some major life reinsurance markets, appear to be leveling out, which could indicate more stable growth in the coming years. Although traditional mortality business remains at the forefront of the life1 business, global reinsurers have begun to expand their business mix. Amid business diversification, geographic expansion, and investments in innovation and digital capabilities, a number of regulatory changes are taking place globally, providing both challenges and opportunities to primary insurers and reinsurers alike.
Life Reinsurance Market OverviewIn 2016, gross written life reinsurance premiums2 amounted to $76.2 billion globally, a 0.7 percent increase over 2015.[i], [ii] The compound annual growth rate (CAGR) was 4.2 percent between 2009 and 2016. The market is expected to grow by about 3 percent to 5 percent on a gross written premium basis in the next couple of years.[iii]
The top five players dominate the global life reinsurance landscape, holding over 71 percent of market share. They are likely to maintain their dominance, especially in the highly concentrated developed markets, despite growth opportunities for some smaller, new or regional players.
Among the top five players, RGA is the only pure life reinsurer. The other four, Hannover Re, Munich Re, SCOR SE, and Swiss Re, operate in both the life & non-life spaces. Trends in the life reinsurance industry are largely indicative of the relative competitive positions and operating performance of the top five players.
Gross premium written by the top five have increased despite a competitive and difficult market environment, mainly due to selective growth opportunities across a few product lines and demand emerging from the developing markets, especially Asia.
Global Life Reinsurance, By Gross Written Premium
Factoring in the share of premiums of the top five players, the life reinsurance industry is dominated by the North American and European markets. The two regions account for over 80 percent of the global market. The Asia-Pacific region currently represents about 18 percent of the global market, but this share of premiums has been steadily increasing over the years, and is expected to reach the 20 percent to 25 percent range by 2020.
Chart 2 and Table 1
Global Life Reinsurance Premium - Top 5 Reinsurers [ii]
From a broader geographical perspective, the future outlook of the top reinsurers is similar, with a focus on maintaining a strong position in North America, expanding presence across Asia and providing reinsurance solutions delivering capital relief in Europe.
In terms of product diversification, the top five reinsurers maintain a substantial share of traditional mortality business, which remains at the forefront of their reinsurance offerings and represents approximately 55 percent to 65 percent of premiums. At the same time, most reinsurers are diversifying into other growth areas such as longevity, health, living benefits and financial reinsurance.
Americas: Still the Primary Source of Near-Term GrowthNorth America remains the largest direct life market in the world in terms of premium volume, and is expected to continue to be the primary source of near-term growth. Despite continuing challenges, life reinsurers have generated fairly consistent earnings. The industry has fundamentally changed over the past decade through consolidation, entry of significant new capital, declining cession rates and InsurTech innovations.
One positive development for the U.S. market is that cession rates seem to have levelled out around the 25 percent mark. This should help stabilize the market, which has been shrinking since 2002 when cession rates reached over 60 percent. In 2015, premium volume reinsured decreased 3.5 percent from the previous year, driven by a decrease in coinsurance business, which dropped by over 10 percent.[iv]
Life Reinsurance Premiums Top 5 (2016)
Factors driving down cession rates over the last decade or so
include increased retention by direct insurers, the availability
of alternative collateral to back reinsurance, mounting
regulatory requirements for captive reinsurance, and more
principle-based reserving of XXX/AXXX reserves.[v]
Although cession rates in the Canadian market declined from 75 percent in 2005 to 63 percent in 2015, the premium volume reinsured increased by 19 percent during the same period. The increase is mainly attributable to the growth of Canadian life insurance business, which increased by over 40 percent.[iv]
Stabilizing Cession Rates [iv]
After the wave of consolidations over the last decade, analysts believe this trend in the life reinsurance market has run its course and do not expect any significant movements in the near to medium term. With the top five reinsurers now accounting for over 71 percent of reinsurance volume, the market is highly concentrated and competition is stiff.
The mortality market presents significant barriers to entry for new players. Long-established global life reinsurers are equipped with abundant capital, strong market positions and economies of scale to help navigate stringent regulatory requirements and make the long-term investments required. There have been no successful global entrants in the mortality space for the last several years.
New entrants are primarily focused on annuity reinsurance and annuity block acquisitions. Long-term opportunity in this space is driven by the number of U.S. life insurance companies with subpar blocks of businesses challenged to reach new markets or earn acceptable returns. Moreover, the low interest rate environment is pressuring annuity returns, and several smaller and mid-sized companies are unable to take on additional investment risks, thereby disposing noncore businesses to release capital for deployment elsewhere. Regulatory uncertainty has contributed to large insurers disposing of capital-intensive or volatile blocks of businesses as well.
Future long-term opportunities exist in the longevity and long-term care reinsurance markets in North America, which remain relatively underpenetrated. However, global life reinsurers that expand their risk appetite too far from their core mortality business could have trouble maintaining their financial strength over time. Their long-term success depends on their ability to maintain a sizable base of profitable mortality business while prudently pursuing new areas of opportunity.
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