Best's Review


Life Reinsurance
Chart a Course

The landscape for U.S. life/annuity reinsurance is becoming more complex and intermediaries are stepping in to help navigate the challenges.
  • Mike Kaster
  • October 2020
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Key Points

  • The Situation: Reinsurers can provide a variety of practical, innovative, and typically customized tools for risk transfer and capital relief for life/annuity insurers.
  • The Rub: Some reinsurers are not as well-equipped as others to manage the risks associated with many of the life/annuity industry’s asset-intensive products.
  • The Solution: Intermediaries are helping life/annuity insurers to find reinsurance remedies to their return-on-capital challenges.


Times have changed in the U.S. life/annuity reinsurance world. Once the preserve of a handful of global risk carriers focused on direct relationships with their insurance company clients, many more reinsurers—including alternative capital providers—are now supporting primary life/annuity writers. They provide a variety of practical, innovative and typically customized tools for risk transfer and capital relief. Specialist reinsurance brokers are helping insurers navigate the increasingly complex alternatives. Together they offer a solution for the capital-constrained U.S. life insurance sector.

Two Types of Transactions

Reinsurance partnerships can be advantageous to insurers in many ways, but two types of transactions have become increasingly popular, beyond the usual transfer of excess mortality risk.

The first is the reinsurance of legacy blocks of business which the original insurer may have decided are no longer core, or are troubled. As regulators have imposed more onerous capital ratios on risk carriers, the impetus to search for ways to ease the economic drag of such in-force blocks has increased. Many insurers have found that arrangements with members of the new generation of reinsurers can provide capital relief easily, quickly and cost effectively.

The second area that is becoming more popular is reducing the strain caused by new business development. Upfront expenses incurred to acquire a new policy include the sales costs and commissions, which may be significant, as well as the onerous reserving required for any permanent, long-duration risk. Without relief, acquisition costs and reserving demands may place an extreme constraint on a life company's growth. They create a capital strain which may take several years to unwind. Reinsurers offer an array of products which provide relief from this new-business capital squeeze.

The challenge presented by the front-end costs of acquiring and reserving life/annuity policies isn't new, but the reluctance of traditional reinsurers active in the life/annuity market to help with it is. Some are not as well-equipped as others to manage the business, and most have moved away from providing capital support. Others may have pulled back with a view to balance their own capital ratios, while still others are reluctant to assume the full set of risks associated with many of today's asset-intensive products.

Changing of the Reinsurance Guard

In the 1990s, perhaps 10 major reinsurers would undertake life/annuity capital relief contracts, but until recently the number had fallen to fewer than five. The old leaders of the field were extremely service-oriented, supplying customers with everything from rating manuals to product design. However, over time they became increasingly focused on very particular types of solutions. Several turned their energies almost entirely toward mortality risk and support services, providing a specific set of ancillary solutions.

In a market which had been barely penetrated by intermediaries, a degree of disruption was inevitable as insurers realized their reinsurers' advice was usually, quite naturally, biased toward their own, favored products. Similarly, larger insurers often do not need the reinsurers' technical support paid for through more-expensive mortality risk transfer. Mortality risk has become commoditized, leaving no margin for the traditional reinsurers to provide additional services.

After more than a decade of product concentration by the major players in the field, these conditions have prompted a gold rush into the life/annuity reinsurance class. “Competition for block acquisitions is high,” AM Best reported in late 2019, stating that many reinsurers, “including direct writers and new entrants, are looking to build scale and deploy capital that has grown in recent years.” AM Best noted: “the growing importance of second and third tier reinsurers is providing needed competition.”

Most U.S. life insurance companies are capital-challenged, a position which has not been eased by 2020's significant capital market fluctuations driven by the global pandemic. Alongside current market conditions, insurance companies will face even greater challenges. Reinsurers are powerful partners to help alleviate the situation. Reinsurance can provide additional capital, or mitigate the amount of capital required when writing new business. They also provide structures which remove the requirement for capital by subtracting liabilities from the original insurer's balance sheet. Brokers can navigate the evolving life reinsurance environment by matching capital to need. Their first line of inquiry will be about the client-insurer's capital-to-surplus ratio, since improving this very important accounting relationship is almost always possible. Recent changes to the set of solutions and providers means navigating the alternatives requires in-depth knowledge of the array of possibilities. Many direct insurers will be unable to navigate the new market alone.

For example, one major international multiline insurer with a large U.S. presence was struggling because a successful portfolio of legacy annuity business was extremely expensive from a return-on-capital perspective. The company sought to dispose of a closed block of this capital-intensive business, in part because the insurer's capital could be more profitably deployed elsewhere. The solution to the problem was to reach out to 18 reinsurance markets on the insurer's behalf. Ultimately, a solution was structured at a competitive price which led to an immediate multimillion-dollar improvement to the client's capital position.

Greater interest from a broad range of capital providers only increases the options and the range of solutions available to insurers and improves the price of transfer.

A New Generation of Reinsurers

Participating in life/annuity reinsurance contracts has become something of a trend among firms looking to deploy capital. Interest in bringing new capital into the U.S. market for this purpose is high, and not all of it has emanated from conventional reinsurers. Capital markets firms, hedge and pension funds, family offices with large assets under management, and other investment groups are looking with increasing intent at the life/annuity space for long-term investments which will fuel their own risk diversification. Several have formed reinsurance vehicles in order to participate, often after learning how difficult it is to participate as direct life insurers. Their entry has made the market to deploy reinsurance capital to life/annuity insurers even more competitive, to the benefit of the original underwriters. The journey to understand these players is not routine, and requires deep understanding of their alternative structures.

Their entry has also benefited the reinsurance intermediaries that specialize in life/annuity business, since the increasingly complex array of products for the sector is now being underwritten and capitalized by a much more crowded field of suppliers. In practice, access to reinsurance providers from the capital markets can be gained only through brokers. Meanwhile, greater interest from a broad range of capital providers only increases the options and the range of solutions available to insurers and improves the price of transfer. Most deals were completed with the involvement of an intermediary. Closed-block reinsurance requires the ability to maneuver through the many possible solutions and advise on the complex rules for life/annuity reinsurance transactions.

Mutual Benefits

Interest in entering the reinsurance market is high because the advantages flow in both directions. Mortality risk is a good hedge for the interest-rate risk that many annuity insurers and capital-markets investors bear. Likewise, life companies or reinsurers may be heavy on mortality risk and will see investment risk as a natural hedge which reduces their overall capital requirements while diversifying income streams. The challenge is finding and matching the right partners, and leveraging the necessary data, broad analytics, and actuarial talent to price and structure deals which will yield mutual benefits. A wide and well-informed knowledge of regulations and program structures in various states and jurisdictions is also essential.

Almost every life/annuity company would like to improve its capital position, especially in today's ever-changing economic environment. Pressure on earnings will be strong due to the pandemic and its related economic impacts, to leave life insurers facing even greater return-on-capital challenges. This is especially true of midsize and regional life/annuity insurers that have been striving for growth. Managing capital can be a constant challenge for all such companies, but an increasingly deep field of specialist intermediaries is now standing by to help. Every solution is unique, tailored to the ceding company and its specific needs. The market to supply them, with its array of new products and entrants eager for reliable returns and risk and income diversification, has never been more attractive.

Best’s Review contributor Mike Kaster is the executive vice president and head of Life Solutions (U.S.), Willis Re. He can be reached at

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