The industry continues to attract new investors.
Higher interest rates and improving mortality trends have created more favourable conditions for life and annuity (L/A) reinsurance companies, but they have also increased competition, particularly from entities backed by alternative investment managers and large private equity firms, according to a recent AM Best report.
According to the research, new capital continues to come into the L/A reinsurance industry, particularly through reinsurers owned by investment managers who specialise in annuities.
These younger market participants want to co-insure assets that can be used to fund high-yielding investments, such as public, private, or alternative fixed income securities. They also provide lucrative ceding commissions, which are motivated by higher expected investment returns from diverse investment opportunities.
The paper emphasises that L/A reinsurers are well-capitalized, with risk-adjusted capitalisation likely to remain strong through 2025, despite persistent risks in their investment portfolios and higher mortality in some regions.
Reinsurers owned by asset managers are more likely to take on investment risks, utilising their parent businesses’ investing expertise in sectors such as structured products, mortgages, and private debt.
Ed Kohlberg, director of AM Best, commented on the long-term implications of these new entrants, stating that their strategy may alter depending on macroeconomic trends, deal availability, and regulatory changes. However, he emphasised that this fresh cash is likely to stay in the market, with substantial extra sums awaiting future opportunities.
The US life reinsurance market has historically faced pressure as primary insurers transferred less risk to third-party reinsurers, leading to a decline in cession rates. However, the recent rise in interest rates has spurred annuity sales, prompting some primary carriers to reinsure more business.
Asset managers have aided this expansion by providing the required cash while imposing minimal dividend limits. Bermuda and the Cayman Islands have grown in popularity as reinsurers seek stable economic and regulatory frameworks, political stability, and access to legal and financial expertise.
Stratos Laskarides, senior financial analyst at AM Best, believes that the significant increase in annuities will continue, with more corporations potentially turning to reinsurers to manage growth and capital levels.
The reinsurance market remains competitive, with a larger share of business being ceded to affiliates and third-party reinsurers, driven by new company formations, partnerships, and private capital entering the market.
Traditional life reinsurers also face challenges due to uncertainty about future mortality rates, particularly in light of the ongoing impact of COVID-19. According to the Centers for Disease Control and Prevention (CDC), as of summer 2024, COVID-19 has been attributed to over 1.2 million deaths in the US.
Although the impact on excess mortality is decreasing, it is not uniform across all demographics. A study by the Society of Actuaries projected that COVID-19 would continue to contribute to excess mortality through 2030, particularly for individuals aged 65 and older. Additionally, external factors such as drug overdoses and accidents have increased since 2019.
Despite these concerns, L/A reinsurers are likely to maintain strong capitalisation until 2025. While life reinsurers have historically avoided the investment risks associated with many primary life insurance products, primary insurers’ diversification tactics, such as annuity and retirement business, increase financial market risk.
The operating structures of large global life reinsurers differ greatly, with some relying on their property/casualty business to balance earnings, which has historically exposed them to less financial market risk than primary writers.
The paper also emphasises the significance of controlling counterparty risk, especially in light of recent high-profile insolvencies in the reinsurance industry. To limit counterparty credit risk, reinsurers are expected to do thorough due diligence, including rigorous counterparty and collateral assessments, particularly as more reserves are ceded offshore.
The competitive market, bolstered by new entrants and private equity-backed reinsurers, is resulting in attractive ceding commissions based on anticipated better investment returns from diverse asset portfolios.
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