We do not expect to see excessive risk-taking among global life reinsurers, although we do expect an increase in risk- taking within companies’ risk tolerances and appetites. Greater risk taking reflects the effect of shrinking market volumes of traditional mortality business, which is causing the sector to take on newer and less well-understood risks.


The life reinsurance sector is prone to periods of aggressive pricing. The most dramatic price rationalization occurred after 2003, and poorly priced mortality risks from before 2003 still impair some reinsurers’ profitability. Coupled with lower cession rates, this has fueled much of the industry consolidation over the past decade. Nevertheless, we view global life reinsurers’ enterprise risk management practices as generally strong, and we anticipate that increased pricing discipline and advances in pricing and underwriting technology should minimize the risk that the industry will repeat these aggressive practices.


Product risk (neutral)


We assess the potential for product risks to trigger ROE volatility as neutral. The global life reinsurance industry generally focuses on writing mortality or protection business, and writes limited amounts of savings products that have related guarantee risk. We consider that this insulates reinsurers from investment risk to a greater degree than in primary insurance markets. We therefore view asset-liability management (ALM) risks as low. That said, significant changes to assumptions, such as on mortality or morbidity, can create some earnings volatility. For example, Australian disability business written in prior years experienced some dislocation, including higher-than- expected claims and lapses in 2013. Life reinsurers’ past aggressive pricing on mortality business and poor experience on variable annuity risks remain a drag on earnings for some companies. Nevertheless, we consider the scope of this business to be limited, and have incorporated it into our expectations for industry profitability in 2014–2016.


Barriers to entry (positive)


We consider barriers to entry for the global life reinsurance sector to be high. We assess regulatory barriers to entry as moderate and operational barriers as high.


Given the global scope of this sector, there are numerous regulatory regimes to


Global Reinsurance Highlights 2014


be considered when assessing regulatory barriers to entry. Most global life reinsurers are domiciled in major developed markets such as the U.S., France, Germany, and Switzerland, where the regulatory frameworks are demanding, but do not prevent market entry.


Our view of operational barriers to entry as high recognizes that the global life reinsurance market is dominated by a few international diversified groups that have specific international market expertise, underwriting capacities, and key underwriting data developed over their long histories. We anticipate that it will be difficult for new entrants to organically build the expertise, client relationships, and underwriting data necessary to succeed in this market. We also consider that the market holds few viable targets that would enable a new entrant to develop a foothold in the global marketplace through acquisition.


Market growth prospects (neutral) We view market growth prospects in the global life reinsurance sector as neutral. The sector has consolidated in recent years, in response to shrinking mortality cession rates in some major markets, particularly in the U.S. and U.K. These two markets accounted for about 55% of the global


“We anticipate that it will be difficult for new entrants to organically build the expertise, client relationships, and underwriting data necessary to succeed in this market.”


market in 2012. However, the U.S. market in particular has contracted by nearly two-thirds in the past 10 years due to higher retentions by the primary market. Although life reinsurers play an important role in the life insurance industry, we expect life primary insurance growth rates to be a solid indicator for global life reinsurance growth in the future. We also consider that the trend toward basing regulatory frameworks on economic principles (such as Solvency II in Europe) will affect the life reinsurance market in the medium term as primary insurers aspire to optimize their risk/return profiles and manage their balance sheets based on economic principles. We anticipate that the introduction of Solvency II could result in consolidation in the European insurance market. This would affect the dynamics of the life reinsurance market. The larger insurers will have more capacity to retain risks, reducing demand for reinsurance and putting life reinsurance margins under pressure. However, in the short- to medium-term, we expect to see increased demand for reinsurance, as it is likely to be one of the main options available to insurers that need to improve their capital positions under Solvency II. This will likely boost reinsurance business opportunities. Many reinsurers have already set up special teams to exploit these opportunities.


Institutional framework (neutral) We regard the institutional framework as neutral. Accounting standards and disclosure practices are generally of high quality and reliable. We assess as intermediate or strong the regulatory oversight and regulatory track record of those markets where most global life reinsurers are domiciled, such as the U.S., France, Germany, and Switzerland. In addition, we do not consider governance and transparency to be weak.


Johannes Bender


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


Ferris Joanis


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


Dennis P Sugrue


London, (44) 20-7176-7056 dennis.sugrue@standardandpoors.com


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