By: Julie Garwood, Manager and KC Cho, Partner, DW Simpson
As seen in the property and casualty reinsurance industry, low interest rates and alternative capital are making an impact in the life reinsurance market. The soft reinsurance market has been and continues to put pressure on reinsurers, requiring them to find ways to remain competitive and differentiate themselves, all while continuing to focus on their core/daily business. There are four ongoing trends to highlight that are influencing the competitiveness in today’s life reinsurance market:
1. Alternative capital and nontraditional players entering the market;
2. Regulatory changes continuing to evolve;
3. Increased mergers and acquisitions (M&A) activity; and
4. Advanced analytics, big data and predictive modeling playing a significant role.
Nontraditional players such as private equity firms, insurance-linked securities (ILS) and investment banks are entering the reinsurance market and seeking new opportunities in life reinsurance. These entrants are adding to the competition and driving prices down, yet providing opportunities in the marketplace. According to RGA Re CEO Greig Woodring and CFO Jack Lay, alternative capital in life reinsurance likely will have a slower growth trajectory than seen for P&C risks, but the diversification it offers will be valuable to investors and efforts to access life risks in new ways will undoubtedly continue. Furthermore, some nontraditional players are using reinsurance that may not have existed previously. Examples of this include annuity reinsurance and longevity risk transfer/ longevity swaps. The demand in these areas has increased over the years, particularly in the U.K., due to change in pensions/retirement laws as well as the implementation of Solvency II.
Ongoing changes in regulatory requirements and other accounting standards (e.g., Solvency II) is another factor driving competition in today’s market. While regulations continue to evolve, regulators are not all on the same page as to what the future holds. In addition, the implementation of various regulations, including Principal-Based Reserving (PBR) and Solvency II in the U.S., are being delayed. Moreover, captives and lines of credit are tightening up their capital standards; while well-designed captives are still a valuable financing tool, their business is being scrutinized more now than in the past
One of the more visible trends within today’s life reinsurance market is M&A activity. Various forces driving this include low interest rates, risk and capital issues, products and regulatory requirements, and accounting standards. The increased activity by private equity firms and alternative buyers has been another M&A driver within life reinsurance over the past five to 10 years. Reinsurer consolidation means fewer but larger reinsurers with increased capacity, for the purpose of increasing organic premium growth. Last, but certainly not least, life reinsurers are turning their attention to new approaches in analytics and data in an effort to gain a better understanding of consumer/buyer behavior. By applying advanced technology such as predictive analytics, in conjunction with performing research to gather the appropriate data and partnering with companies who specialize in these areas of technical expertise, companies can successfully create solutions for the future.
What will this mean for the job market?
There are many serious challenges facing the life and annuity reinsurance industry today. However,competition and obstacles can also breed innovation. Thus, it’s an exciting time to be an actuary in the reinsurance space, whether you work for a reinsurer, consulting firm or carrier. Reinsurance actuaries are in the forefront of every major issue in the insurance sector. They are now expected to possess more than just unparalleled technical proficiency. Today, they are required to learn new quantitative skill sets, present and defend a business case to a wider array of professionals, and master the art of persuasion through influence. Essentially, every major reinsurer, along with others in this space, are seeking the same caliber candidate. The demand for reinsurance actuaries has never been stronger throughout the world. One significant trend has been the increase of activity in offshore markets, such as Bermuda. While there have been many changes, with more to come, the increasing demand for sharp reinsurance actuaries remains constant.