© Oliver Wyman CONSULTING ACTUARIES
WHAT’S TRENDING IN REINSURANCE? 2015 Life and Annuity Symposium
May 4, 2015
Alberto Abalo FSA, MAAA, CERA
1 © Oliver Wyman 1
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Amt. Retained 675 705 809 952 1,089 1,207 1,212 1,148 1,168 1,218 1,260 1,186Amt. Reinsured 1,078 1,043 1,037 844 724 683 658 596 505 461 446 443% Reinsured 61.5% 59.7% 56.2% 47.0% 39.9% 36.1% 35.2% 34.2% 30.2% 27.5% 26.1% 27.2%
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Cession rates have been on the decline…
U.S
. Bill
ions
U.S. ordinary individual life insurance sales
Source: Society of Actuaries Life Reinsurance surveys, conducted by Munich American Re
2 © Oliver Wyman 2 DILBERT © 2004 Scott Adams. Used By permission of UNIVERSAL UCLICK. All rights reserved.
3 © Oliver Wyman 3
2011 2012 2013Amt. Retained 1,218 1,260 1,186Amt. Reinsured 461 446 443% Reinsured 27.5% 26.1% 27.2%
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…but the market appears to have reached equilibrium Consistent level of ceded new business 2011 – 2013
U.S
. Bill
ions
U.S. ordinary individual life insurance sales
Source: Society of Actuaries Life Reinsurance surveys, conducted by Munich American Re
Year-over-year increase in
cession rates for the first time in
11 years
4 4 © Oliver Wyman
What’s trending in reinsurance Tweets from the streets
1 #AG48 #Captives #ShadowInsurance
Actuarial Guideline 48 PBR comes early for companies financing XXX/AXXX reserves
2 #M&A #NewPlayers
Reinsurance market consolidation continues M&A activity is strong Non-traditional buyers getting into the insurance game
3 #Misc #BigData #Longevity
Other trends include: Automated UW, pension de-risking, emerging markets, use of “certified” reinsurers, …
6 © Oliver Wyman 6
Use of captives partly to blame for dropping cession rates?
Source: A.M. Best; Koijen & Yogo Available at http://www.economist.com/news/finance-and-economics/21589917-american-life-insurers-are-less-robust-they-seem-life-shadows
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7 © Oliver Wyman 7
“Shadow Insurance” Captives under scrutiny
Use of term shadow insurance, echoed in the popular press, conflates use of captives with the banking practices that led to the 2008 financial crisis
“State insurance commissioners should consider an immediate national moratorium on approving additional shadow insurance transactions.”
– NY State Dept of Financial Services (June 2013)
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9 9 © Oliver Wyman
2013 2014
A History of AG48
October 2011 • NAIC Captives and SPV Use
Committee Subgroup (E) established
August 2014 • NAIC adopts new XXX/AXXX Reinsurance Framework • NAIC exposes AG 48 draft
2012 2011
June 2013 • New York Department of Financial Services
(DFS) releases report criticizing growing use of captives and SPV’s: “Shining a Light on Shadow Insurance”
December 17, 2014 NAIC adopts final version
of AG48, effective 1/1/2015
July 2013 • NAIC PBR Implementation Task force hires outside
advisors Rector & Associates to address issues disclosed in White Paper
Early 2012 • Subgroup begins work on White
Paper detailing regulatory concerns regarding use of captives and SPVs for reserve financing
September 2013 • Rector & Associates releases initial
recommendations for new NAIC XXX/AXXX Reinsurance Framework
June 2014 • Rector & Associates releases final
recommendations for new NAIC XXX/AXXX Reinsurance Framework
Early 2013 • NAIC Captives and SPV Use White
Paper released (final draft formally adopted July 2013)
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10 © Oliver Wyman 10
Impact of AG48 on reserve “redundancy” Term insurance
While AG48 creates an additional layer of reporting requirements, the newly required level of primary asset for a typical term product is not too dissimilar from the economic reserve in this example
Illustrative example
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Stat reserve (XXX)
Economic reserve
AG48
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11 © Oliver Wyman 11
Impact of AG48 on reserve “redundancy” (continued) UL with secondary guarantees
The impact of AG48 on ULSG business has created a larger disruption in the reserve financing landscape
Increase in captive reserve under AG48
Illustrative example
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AG48
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12 12 © Oliver Wyman
Industry reaction The response from insurers and reinsurers has been varied
1 2 3 4 Slowdown in 2015 captive activity
Warehousing
Renewed interest in traditional reinsurance
Re-evaluation of product offering
• Observable rush to close deals in YE 2014
• Followed by slowdown in 2015 captive activity
• Some insurers holding on to business to achieve scale due to decreased levels of redundancy
• Begrudgingly accepting strain associated with carrying this business
• AG48 not intended to apply to “traditional” reinsurers
• Co-insurance and mod-co transactions could be seen as alternative to financing mid-sized blocks of inforce business
• Many insurers have taken a “wait-and-see” approach with respect to the financing implications and have not yet re-priced their products
• 2015 has already seen some carriers take ULSG products off the shelf, without replacement
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14 © Oliver Wyman 14
Rest of Market 4% General Re Life
3% Hannover Life Re
11%
Munich American Re
15%
RGA Re 19%
Swiss Re 20%
SCOR Life Re 28%
Rest of Market 5%
General Re Life 3%
Transamerica Re 15%
Munich American Re
12%
RGA Re 22%
Swiss Re 12%
SCOR Life Re 3%
Generali USA Life Re 7%
Scottish Re (US) 16%
Canada Life 5%
US Individual Life reinsurance market share Then and now
2005 market share 2013 market share
Source: Society of Actuaries Life Reinsurance surveys, conducted by Munich American Re
Top 5 as % of total 2013 2005
77% 93%
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15 © Oliver Wyman 15
New entrants have emerged as key players in the M&A market Acquirer/Seller (Date)
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17 © Oliver Wyman 17
Increased sales through automated underwriting
Target: Middle market & millennials
• Convenience
• Faster turnaround
Solution: Rules engines
• Automated underwriting
• Straight-through processing
Byproduct: Predictive Analytics
• Big data
• Predictive underwriting
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18 © Oliver Wyman 18
Longevity reinsurance
Date Size Cedant Insurer / swap provider Participating reinsurer
Mar 2015 CAD $5bn Bell Canada Pension Plan
Sun Life Financial SCOR, RGA
Dec 2014 £1bn Rothesay Life Pacific Life Re
Jul 2014 £16bn
BT BT Pension Scheme Prudential
Mar 2014 £5bn Aviva Aviva Life & Pensions Munich Re, Swiss Re, SCOR
Dec 2013 £3bn
AstraZeneca Deutsche Bank
Feb 2013 £3bn
BAE Systems Legal & General Hannover Re
Source: www.artemis.bm
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19 © Oliver Wyman 19
Other trends on the radar
2020+ 2020+ 2015 2015 2010 2010
Growth in Asia & Latin
America
PBR
Section 8
NAIC “certified
reinsurers”
Combo Products
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