“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 effi ciency.”


“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 effi ciency.”


This focus on capital effi ciency is especially important given the current


economic climate, with many markets still experiencing uncertainty. “In terms of market conditions, one needs to fi rst 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.


“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 signifi cantly—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 fi rst 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,


56 | INTELLIGENT INSURER | Summer 2011


which are a major retirement product in the US. These alternatives offer the possibility of higher returns and greater fl exibility 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 refl ect 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 signifi cantly 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 diffi cult 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 specifi c 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.


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