October 29th, 2018

Life: Emerging Competition and the Need to Remake the Reinsurance Relationship - GC@PCI Commentary

Posted at 9:00 AM ET

rains_david-5-2015-reduced-sizeDavid Rains, Managing Director


  • Life reinsurance value prop a combination of risk capital, differentiated underwriting knowledge and value-added services
  • Availability of capital and insurers’ success in closing knowledge gap in underwriting reduce need to purchase risk protection
  • Reinsurers can position their InsurTech and advanced technologies to make advisory services a core deliverable

The life reinsurance sector has been shrinking for several years, but reinsurers possess the capabilities to remain relevant and vital if they take a strategic approach. They may then be able to better meet their cedents’ principal needs and solidify or increase their value to life insurers, according to David Rains, Managing Director, Guy Carpenter.

The life reinsurance value proposition has long been a combination of risk capital, differentiated underwriting knowledge and a variety of value-added services supporting the risk transfer decision. “Essentially, reinsurers have bundled their offering and, as a result, primary insurers buy risk protection they may not need in order to receive support in underwriting, large case capacity, complex cases and product development,” Rains says.

This system does not include modern factors and lacks transparency – it is a legacy model that no longer aligns with what customers want and is vulnerable to disruption.

“The widespread availability of capital and insurers’ success in closing their knowledge gap in underwriting expertise have reduced their need to purchase risk protection,” Rains adds. “The appearance of sophisticated data companies, advanced modeling capabilities and InsurTech disruptors allow the emergence of new market participants that may challenge reinsurers’ dominance in advisory services.”

“Life insurers’ demands for the bundled advisory services have been critical motivators for the purchase of reinsurance capital. In an environment of reduced need for and decline in purchase of reinsurance capital, reinsurers worry that a separation of advisory services from risk transfer solutions may cause further declines in purchases,” Rains says. “Reinsurers have linked the sale of new risk protection solutions with their offerings of knowledge and expertise because they believe there is a strong connection, but the connection is not airtight. The reinsurance advantage is being questioned as capital is abundant and primary insurers’ comfort with their own risk is growing.”

Rains explains that one area where the knowledge gap has narrowed is underwriting. While they cannot match a major reinsurer’s stockpile of data, larger insurers have enough of their own experience from the modern era to challenge the marginal practical value of more data in risk selection and pricing. Further, data science and medical models from outside the industry offer new and potentially better ways to assess risk. “Medical data availability combined with advanced predictive analytics and genetic testing is an area with great potential for outplaying reinsurer contributions,” Rains adds. “Traditional underwriting is still dominant, but is becoming less a necessity and more a comfortable habit that may be attacked over and over by smart innovators with good ideas.”

“It is imperative that reinsurers enhance their value proposition around their risk solutions and their business model,” Rains continues. “There is ample room to support customers by addressing more complex risks that combine mortality, longevity, investment and morbidity, but most reinsurers focus on only one or two of those areas and expect the customer to keep the rest or solve it on their own.”

“Though reinsurers are expanding the scope and quality of their advisory services,” Rains says, “they are not responding or adapting fast enough to insurers’ changing needs. They are advancing their value-added capabilities, but the strategy may not work effectively if it remains tied to new mortality cessions – a narrow part of the insurer-reinsurer relationship. Reinsurers can also position their InsurTech and advanced technologies to make their advisory services a core deliverable.”

He adds: “Guy Carpenter is working to help reinsurers and the life reinsurance market better serve the needs of the clients by curating partnerships with capital and service providers that highlight the advantages that each party brings. Guy Carpenter enables insurers to utilize the capabilities of InsurTech, emerging technology and advanced analytics to achieve sophisticated enterprise-level solutions.”

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