Appetite For Longevity?
America's looming retirement crisis and mispriced longevity products present a 'massive' growth opportunity for life reinsurers.
- Jeff Roberts
- August 2018
Massive Opportunity: The value of longevity reinsurance transfers/swaps surged from $9 billion in 2010 to $62 billion in 2014 and $50 billion in 2015.
Highly Concentrated: After a wave of consolidation, five reinsurers control four-fifths of assumed life premium.
Stabilizing: Cession rates have leveled out at about 25%—and may have modestly increased lately—after steadily falling since 2002, when they stood at about 60%.
Colin Devine, C. Devine & Associates
Longevity or lifetime income annuities are a massively untapped market.Those are capital-intensive products. If I want to manage my growth, reinsurance would be an integral part of how I do that.
The troubling metrics defined the years after the crisis.
Stagnant growth hit the U.S. life insurance market. Plunging cession rates fell even further as primary carriers retained more of their risk. And prolonged low interest rates, changing buyer demands and regulatory volatility only raised more questions.
Those currents helped drive a wave of consolidation in the U.S. life reinsurance market, as the major players added scale to reposition themselves while the middle market largely vanished.
But a decade after the financial crisis, the life reinsurance industry is stable. Cession rates have leveled off. The consolidation ran its course. And a “massive opportunity” has emerged in longevity products, according to a consensus of market analysts and consultants.
“The traditional life reinsurance market is steady as she goes because the demand for life insurance is steady as she goes,” said Colin Devine, principal and senior adviser of C. Devine & Associates, a consulting firm in the insurance and investment management sectors. “You haven’t seen really much change at all. It’s going to remain an oligopoly.
“The potential for longer term growth is the longevity piece, which is tied to the sale of income annuities. That’s the future. If I looked at what’s going to drive the stronger growth in the life reinsurance market over the next 10 years, it will be writing longevity reinsurance.”
Five reinsurers—RGA, Munich Re, Swiss Re, Hannover Re and SCOR—control four-fifths of assumed life premium in the U.S. reinsurance industry, according to A.M. Best. Meanwhile, cession rates have stabilized at about 25%—and may have modestly increased of late—after steadily falling since 2002, when they stood at about 60%.
But the impending retirement crisis in the United States, driven by an aging American population living longer yet unhealthier and with increasingly precarious safety nets, presents a considerable avenue for growth.
Analysts see promise for reinsurers in single premium immediate annuities, deferred income annuities, pension closeouts and even long-term care and indexed or variable annuities with living benefits.
However, the longevity business also poses significant pricing risk due to the long-tail nature of the products. It has made some reinsurers cautious—even wary—of taking on too much exposure.
But they can capitalize by using improved technology such as wearables to sharpen underwriting and pricing and by forming partnerships with genomics, health care and wellness companies to provide hybrid insurance and medical solutions.
Longevity presents the chance for reinsurers to expand beyond their core mortality business and diversify as growth in the primary life space remains near stagnant.
“Longevity or lifetime income annuities are a massively untapped market,” Devine said. “Those are capital-intensive products. If I want to manage my growth, reinsurance would be an integral part of how I do that.
“The ability to more finely price underwriting risk and potentially monitor it over time could make it a very attractive market. It strikes me that as a country we are woefully underprotected with respect to our longevity risk. People increasingly should worry about how long they’re going to live. They want protected lifetime income,” he said.
And industry leaders can leverage expertise they already possess. Many hold experience from operating in the already developed United Kingdom market.
“Reinsurers are always looking for areas of growth, but also areas where they can add value,” said Kai Kaufhold, partner, prediction consulting and longevity with the advisory firm NMG. “Being specialists in mortality and analyzing experience, they have the right skill set to understand longevity risk.
“Most organizations have spent a lot of time investigating longevity risk and built models to be able to service the U.K. market. And now they’re essentially leveraging that capability across the globe. And obviously with the U.S. being the largest life reinsurance market, it’s natural for them to be very interested,” he said.
Recent reports by McKinsey & Company and RGA point to longevity as a future growth area for life reinsurers.
And A.M. Best noted in its 2018 U.S. life reinsurance report that longevity—including pension risk transfers—could “serve as a natural (albeit imperfect) hedge” for reinsurers carrying sizable mortality books.
William Pargeans, director, A.M. Best, says aging baby boomers will be looking for income protection, thus the opportunity for insurance companies to increase sales of payout annuities is staged for growth.
“The corollary to that is companies that sell longevity business are going to want some protection against mortality,” he said. “It would probably serve as a nice future revenue stream for reinsurers as well. It plays well together,” he said.
U.S. Life/Annuity – Top 10 Reinsurers Assuming Business from Non-Affiliates
||Market Share (%)
|Ultimate Parent Name
||2016 Face Amount ($ Trillions)
|Great-West Life Group (Canada Life Re)
|SCOR Life US Group
|Hannover Life Reassurance Co of America
|Swiss Re Life Group
|Munich American Group
|Aegon USA Group
|Metropolitan Life and Affiliated Companies
|Berkshire Hathaway Group
|Voya Financial Group
Source: A.M. Best data and research
A Dominant Few
And then there were five.
Or maybe six.
After the consolidation, the top five reinsurers control 61% of the face amount of the U.S. life market from non-affiliates, according to 2016 A.M. Best data. The top six hold 68.5%.
It is a highly concentrated, competitive field. The middle market has largely disappeared amid the consolidation, according to the 2017 Deloitte research report, Reinsurance as a capital management tool.
RGA held 14% of the U.S. market in 2016 with $1.9 trillion in face amount business, according to A.M. Best, followed by SCOR (12.8%), Hannover Re (11.5%), Swiss Re (9.9%) and Munich Re (7.5%).
Great-West Life also held 12.8% of the U.S. market in 2016—with a face value of $1.7 trillion.
The top players carry highly defensible market positions, and they’re growing. The market share of the top 10 U.S. life reinsurers rose to 83% in 2016 from 65.6% in 2006.
But the traditional life industry’s struggles could continue to reduce demand for mortality reinsurance.
“Obviously growing life sales remain a real challenge for the industry,” Devine said. “They’re looking at 1%, 2% a year. That hasn’t changed. There’s no reason to think that’s going to change any time soon.
“And even though people need the product, some in the industry make it too tough to issue a policy. It’s a two- to three-month process to get a life policy issued, which is somewhat ridiculous.”
Meanwhile, primary insurers continue to seek options with captive reinsurers, even if ceded amounts to affiliated entities declined 6.6% in 2015 and 10.1% in 2016.
So top line growth is a priority.
Yet A.M. Best’s outlook for the life reinsurance sector is stable, thanks to the steady mortality market, favorable capitalization and reinsurers’ conservative investment approach.
Growth on Horizon?
Then there’s the potential for growth.
Several U.S. life insurers hold subpar blocks of business such as variable annuities and seek to employ capital in better-margined products, which likely will mean greater dependence on reinsurance.
The relatively underpenetrated long-term care market also offers the potential to not only cover existing books but help primary insurers innovate and improve offerings.
“Rates are a slowly creeping problem as companies come to grips with underwriting mistakes made on universal life with secondary guarantees, long-term care, variable annuities,” Devine said. “These past underwriting mistakes are going to lead to companies having to raise capital or position their balance sheets more optimally.”
Life companies may also look to reinsurers to help manage increased capital requirements. Tax reform may have reduced some demand, but only in the short term.
There is precedence: The longevity risk transfer market developed in the U.K. due to Solvency II, Kaufhold said.
“Other markets probably haven’t been under that much regulatory pressure until now,” he continued. “But I think with changing capital requirements in the U.S., that might actually trigger some massive shifts away from retaining longevity risk on the primary insurance companies’ balance sheets.”
For reinsurers, it all starts with underwriting. Technology and data analytics can make it more precise and efficient.
Devine pointed to John Hancock’s Vitality Program, which rewards life policyholders with lower premiums for healthy lifestyle choices using wearable technology and games.
“It comes down to understanding the risk profile of a book, not just at the time it’s sold, but to really watch how that risk unfolds over time,” Devine said. “It’s not just waiting 50 years for the claims to come in and hope I got it right.
“Access to medical records on a time-efficient basis and the use of wearables such as Fitbits and Apple Watches that are tracking things like heart rate help price risk more efficiently. And if I was a reinsurer and felt the primaries got it better, then I probably would give them a better price to reinsure it,” he said.
After all, longevity gives reinsurers the chance to not only grow but diversify. The value of longevity reinsurance transfers/swaps surged from $9 billion in 2010 to $62 billion in 2014 and $50 billion in 2015, according to McKinsey’s 2017 white paper, Global reinsurance: Fit for the future.
“There’s a huge demand for the other side of life reinsurance if you could do that well,” Devine said. “And we are going to see sales of those products measurably grow as people become more educated about their risk of living a long time. It’s good news/bad news: You could live a long time, but you could run out of money.
“It’s part of the same equation, whether you’re pricing when someone is going to die or how long they’re going to live.”
Meanwhile, the market for managing pension assets in the U.S. continues to grow.
Single-premium pension buyout sales rose 68% in 2017 to $23 billion, according to the LIMRA Secure Retirement Institute. The total ranks behind only the $36 billion in deals reached in 2012.
Reinsurers’ expertise and capacity to both access and manage these significant risk pools could prove to be a differentiator.
But longevity risks present challenges of their own.
Primary life insurers Prudential, MetLife, Principal Financial Group and Legal & General dominate the U.S. pension risk transfer industry. And it is not without its complexities.
MetLife admitted “material weakness” in its financial reporting and boosted its reserves $510 million pretax after disclosing recently that it lost track of 13,500 retirees. The company owed them monthly benefits it assumed in pension risk transfers.
And longevity raises long-tail risks unforeseen when products were underwritten. For instance, variable annuities with living benefits and long-term care products have been the bane of the life industry.
“Those are two lines of business where insurers in the past wrote a substantial amount of business and lost a whole lot of money doing so,” Kaufhold said. “At the time, it obviously seemed like a great opportunity. Remembering that, reinsurers are going to be careful that they’re not making similar mistakes with longevity risk, and they’re going to limit the amount of capacity that they provide to make sure.
“But of course with the demographic shift, the whole focus of the retail market is going to evolve around the portion of the population that has a need and the resources to spend to service that need. And longevity risk factors into that because with evolving regulation, it’s going to become expensive to hold that on a balance sheet.”
Devine views reinsurers as best positioned to take on that exposure.
“They employ some of the smartest underwriters on the planet. I almost argue that they’re the only ones equipped to take it on,” he said. “They definitely understand the risk more than anybody.”
Abundant capital. Strong market positions. Economies of scale.
Unlike other segments, the U.S. life reinsurance space poses imposing barriers to entry. No one has successfully broken into the global mortality space in several years, according to RGA.
The few new entrants have focused primarily on acquiring underpriced annuity blocks to accumulate and invest assets, not manage mortality.
“We’re definitely seeing a focus on those distressed annuities where they can really run the assets and get more of a distressed sale,” Devine said. “They think they’re getting a bargain. In the traditional life insurance market, there’s no bargains to be had.”
The consolidation and a lack of entrants have narrowed the number of entities accepting ceded business by 40% between 2006 and 2016, hardening prices for buyers. Deloitte expects the hardening trend to continue.
And few reinsurers have the capacity to meet the needs of the largest primary life companies. So carriers typically spread risk over three or four reinsurers.
Of course, reinsurers do more than reduce insurers’ exposure. They free up capital and manage earnings volatility through expert risk and capital management. They offer sophisticated underwriting, product design expertise, help write business, reduce claims costs and leverage advanced data analytics to improve pricing and strategic focus.
They have forged bonds with primary insurers over decades that are “often analogized to a partnership,” according to the ACLI’s Carolyn C. Cobb, vice president and chief counsel, reinsurance and international policy. Those relationships have strengthened the reinsurers’ hold on the market.
“With life, it has to be a partnership. That’s the only way it works,” Devine said. ”You’re playing the long game. So you really have to be comfortable with the underwriting tendencies of that primary.”
The information sharing is unprecedented in other reinsurance sectors.
“In my experience, longevity risk reinsurance is indeed an area where there’s an astonishing amount of transparency between the ceding company and the reinsurer,” NMG’s Kaufhold said, “as to what their respective assumptions are and what the actual risk margins are that they are taking to cover the risk.”
As a result, A.M. Best does not expect start-ups or short-term capital investors to disrupt the global market. That leaves a larger share of longevity business.
“The market for income protection products will continue to grow very strongly,” Devine said. “And I can’t imagine that if I was a primary that I wouldn’t want a reinsurance company involved to help me manage that risk,” Devine said.
Jeff Roberts is a senior associate editor. He can be reached at firstname.lastname@example.org.