Life insurers typically purchase reinsurance covers to achieve four main goals – capital management, catastrophe protection, volatility mitigation and product support. In some instances, each of the solutions are separately decisioned and purchased, but frequently may be combined into one reinsurance program. In today’s environment, an analysis that challenges the usual life reinsurance customs and practices around companies’ volatility management is warranted, according to David Rains, Managing Director, Guy Carpenter.
Rains begins by clarifying the fourth reinsurance “purpose” on the list – product support, which drives the majority of life reinsurance that is currently in-force, today. It may include reinsurer support of product development or proprietary smart underwriting platforms, particularly in new markets or for new products where the reinsurer is primarily bringing biometric risk expertise and local product knowledge. In this area, the business may be mostly reinsured (coinsured) from the first dollar. “A more traditional approach, however, may include these features: actuarial and underwriter consultation, access to the reinsurer’s underwriting manual, facultative support for risks outside the automatic acceptance parameters and pricing structures customized to the underlying insurance product. The features here are typically facilitated by per life excess reinsurance on a yearly renewable term basis,” Rains explains.
In both sets of product support approaches, coinsurance and yearly renewal term, some amount of volatility and capital strain is transferred to the reinsurer as a fixed-for floating eternal mortality swap. The contract negotiations for this are typically difficult and the results may last months or years after the basic agreement on pricing, as both parties look to protect themselves against any number of future actions by their counterparty.
Rains continues: “Broadly, cedents want to ensure that the reinsurers will be able to pay claims and provide reserve credit perpetually. Reinsurers want to ensure that the cedent’s provided experience reflects future sales and certainty that the cedent will continue to carefully underwrite and manage claims as well as if the business were not reinsured.”
Traditionally, the only way to purchase volatility mitigation was through a classic, forever reinsurance structure purchased at the product level that provided “bundled” benefits that cedents may not need or want. As exposures and experience develops, reinsurers may lose their historic advantage of risk knowledge – big data and medical models will compete with the traditional underwriting support offered by reinsurers. The risk management buying process is misaligned to the dynamic needs of insurers in today’s market.
“With the data, analytics and technology options available to insurers today, the time has come time to challenge the traditional reinsurance paradigm and elevate solutions for volatility management to the enterprise level,” Rains says.
Volatility mitigation focuses on managing a company’s quarterly and annual experience fluctuations at an enterprise level, not substituting reinsurer pricing and expertise for their own on a by-product basis. Solutions can be shorter-tailed rather than “locked in.”
As the number of potential markets dwindles for traditional life reinsurance, available alternative solutions open up access to many more counterparties. The solutions include layered three to five year risk contracts or non-proportionate covers, such as stop-loss.
Volatility is an enterprise concern that does not relate to only a particular product. An enterprise’s product portfolio will naturally bring diversification that results in the aggregate volatility being less than the sum of the individual products’ volatility.
“Purchasing protection at the corporate level avoids overpaying for unneeded risk transfer, preserves strategic, long-term options for the business and provides healthier, more active relationships with risk partners,” says Rains. “Avoiding unnecessarily lengthy reinsurance negotiations retains cedents’ flexibility and the speed-to-market needed to gain advantages.”
Guy Carpenter is working to help reinsurers and the life reinsurance market better serve the needs of clients by curating partnerships with capital and service providers that highlight the advantages that each party brings.
Rains mentions that Guy Carpenter’s deep market insights help clients restructure reinsurance relationships and negotiate treaties. For example, we have supported the development of reinsurance contract language for clients that enables transition out of treaties that have become less reflective of the company’s current capital needs to those that bring the best opportunities to free-up capital for deployment to achieve growth.