lessons from the past as it pursues new opportunities. Although the fallout from poorly priced mortality risks from pre-2004 is diminishing, it remains a stark example of the sector’s susceptibility to periods of aggressive pricing. More recently, poor performance of the Australian income protection (IP), total permanent disability (TPD), and group risk business lines illustrates the sector’s inability, at times, to anticipate and price for potential adverse outcomes adequately.


We believe the higher claims and lapse rates in Australia’s IP, TPD, and group risk business lines have been due in large part to the nation’s softer economy and inadequate pricing in these segments. Above-average unemployment rates have boosted the number of claims for stress-related illness. In addition, legal professionals appear to be focusing actively on this sector, now that tort law reforms during the past decade have limited their ability to litigate personal injury claims.


In the lead-up to the current situation, Australian reinsurers were buoyed by rising premium growth, especially from group schemes that provided increased insurance offerings. At the same time, primary underwriters enjoyed relatively low retentions per risk, sometimes less than A$100,000, which skewed the risk pendulum clearly toward the reinsurers. Notably, the New Zealand market has a similar structure but did not suffer the same experience, possibly because lapse rates narrowed and reinsurers became more conservative in their underwriting and risk awareness after the Christchurch earthquakes in 2010 and 2011, and government schemes continued to cover personal injury claims.


We expect claims in Australia’s IP, TPD, and group risk business lines to remain elevated during the next few years, but significant premium rate increases and the progressive implementation of more- conservative benefit designs across the industry will temper the impact somewhat. Although reinsurers are taking pricing actions and tightening up underwriting, some structural issues—including the stepped premium feature (which makes automatic age-based premium increases) and generous upfront commission structures, both of which promote higher lapse rates—will be tough to resolve quickly. These business lines, therefore, will likely remain challenges for the sector because reinsurers will need to


Global Reinsurance Highlights 2014


Table 1: Ratings And Outlook For Five Largest Reinsurers Ratings AA- AA- AA- A+


Hannover Re Bermuda Ltd. Munich Reinsurance Co. RGA Reinsurance Co. SCOR SE


Swiss Reinsurance Co. Ltd.


“Despite the various competitive pressures global life reinsurers face, most have maintained relatively disciplined pricing standards and continue to generate favorable returns.”


resolve these issues before they can expand their capacity for group risk in these lines (see Chart 4).


Profitability Remains Strong


Despite the various competitive pressures global life reinsurers face, most have maintained relatively disciplined pricing standards and continue to generate favorable returns in recent years. We believe this trend will continue and estimate an industrywide return on equity of more than 10% on average for 2014– 2016, which is generally in line with recent historical averages. Supporting this view are our assumptions that the operating return on embedded value will be about 8%–12%, and that new business margins will be about 3.5%–4.0% (based on the present value of new business premiums in 2014–2016).


The “Big Five” Reinsurers Should Maintain Stable Ratings And Dominant Market Share Five companies dominate the global life reinsurance sector based on market share. Among them RGA Reinsurance Co. is the only pure-play life reinsurer in the group; the others are members of the


AA-


Outlook Stable Stable Stable


Positive Stable


respective composite groups, Hannover Rueckversicherung AG, Munich Reinsurance Co., SCOR SE, and Swiss Reinsurance Co. Ltd., which operate in the global life and non-life insurance markets. According to the latest NMG Consulting study, these five companies assumed roughly 78% of new global individual life cessions and approximately 72% of total group life cessions through June 30, 2013. For this reason, our expectations for trends in the industry largely reflect our analysis of life reinsurance operations for the “big five,” particularly their relative competitive positions and operating performance (see Table 1).


In our opinion, the life reinsurance business provides diversification and a relatively stable earnings stream for the composite groups, which is a net positive for their credit. We expect the largest global life reinsurers to maintain their dominant market shares, especially in the highly concentrated developed markets. However, because direct writers’ risk policies generally limit their exposure to any one life reinsurer, we believe a life reinsurer will find it difficult to maintain market share of much more than 25% without lower-than-average pricing or an exceptional competitive advantage. Over time, we believe this dynamic could create growth opportunities for some smaller or regional reinsurers and attract new players to the market, but it’s unlikely to produce true rivals to the big five for many years. 


Ferris Joanis


New York, (1) 212-438-5552 ferris.joanis@standardandpoors.com


Johannes Bender


Frankfurt, (49) 69-33-999-196 johannes.bender@standardandpoors.com


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