Presentation - Institute of Actuaries of Australia

Life reinsurer of the future
Staying relevant in the face of a changing landscape
Shweta Krishna & Stuart Mainland
© Shweta Krishna & Stuart Mainland
This presentation has been prepared for the Actuaries Institute 2015
Actuaries Summit.
The Institute Council wishes it to be understood that opinions put forward
herein are not necessarily those of the Institute and the Council is not
responsible for those opinions.
Agenda
•
Life reinsurance in Australia
•
Life reinsurance globally
•
The future horizon
•
So what do we learn?
Life reinsurance in Australia
What drove reinsurance?
Then
Now
• Access to underwriting
manual and claims
experience
• Capacity the primary
market may not have
• Reduce earnings
volatility / capital strain
!
-
Then
• More aggressive
reinsurance pricing
• Re-shape risk taken to
align to insurer’s risk
appetite
• Global, technical insights
Reasons to reinsure in the past remain relevant today
Now
!
-
Reinsurer % of in-force premium
Changing business mix during 2000s
50%
41%
33%
24%
15%
Oct-18 Oct-17 Oct-16 Oct-15 Oct-14 Oct-13 Oct-12 Oct-11 Oct-10 Oct-09 Oct-08 Oct-07 Oct-06 Oct-05 Oct-04
Total risk
Group risk
Individual lump sum
Individual disability income
Source: Plan For Life statistics
Reinsurance rate relatively stable but business mix has changed
Continued strong premium growth
In-force premiums have more than doubled in last ten years.
In-force premium for
reinsurers ($million)
4,000.000
3,000.000
2,000.000
1,000.000
0.000
Oct-18 Jan-18 Apr-17 Jul-16 Oct-15 Jan-15 Apr-14 Jul-13 Oct-12 Jan-12 Apr-11 Jul-10 Oct-09 Jan-09
Source: Plan For Life statistics
Individual lump sum
Individual disability income
Group risk
Volume growth has been attractive; at what price?
Cedant & Reinsurer Annual Net Profits Group Death/TPD -
300
500
375
150
250
0
$ million
$ million
Turbulent times
Cedant & Reinsurer Annual Net Profits
- Individual DII -
-150
-300
125
0
-125
-250
-450
-375
-600
-500
2008
2009
2010
2011
2012
Profit Margin % (net)
Reinsurer
Direct Writer
2013
2014
2008
2009
2010
2011
2012
2013
2014
Profit Margin % (net)
Reinsurer
Direct Writer
Source: APRA Life Risk Insurance – A challenge to the life industry: managing for long term portfolio health: Insights Session at Actuaries Institute by
Ian Laughlin
Causes of losses
•
Different break-even points and materiality
•
Competitive market conditions
•
Less data / less timely data
•
Definitions scope creep
•
Long guarantee periods
Pricing discipline needed in a competitive environment
Life reinsurance globally
Looking sideways – global snapshot
Continental Europe
UK & Ireland
8% of global life premiums
North America
Cession rates 80%+
24% of global life premiums
Underlying business tends
to be level premium
Cession rates c25%
New reinsurance business
tends to be reviewable
premium though historically
coinsurance
28% of global life premiums
Cession rates <10%
Generally surplus reinsurance
with high retention limits
Asia
34% of global life premiums
Cession rates 5-15%
Reinsurance primarily risk premium
Australia
2% of global life premiums
Cession rates c40%
Annually reviewable premiums
Reinsurance generally quota
share
Premium source: Swiss Re Sigma 2013 / 3
Cession rates: NMG data presented in Actuary magazine
Market commentary: EY research
Looking sideways – what is there to learn
Cession
rate
60-100
%
20-60%
Market features
Likely to
change
!
Regulatory arbitrage
! Reinsurer risk evaluation aggressive
! Proportional reinsurance dominant
?
?
✓
⌔
?
⌔
!
New business strain
! Volatile earnings
! Periods of pricing instability
✓
✓
✓
✓
⌔
?
Barriers to entry
! Lack of granular data
! Surplus reinsurance dominant
! Language barriers
⌔
⌔
⌔
⌔
⌔
⌔
⌔
⌔
!
0-20%
Feature of
Australia
Market conditions unlikely to see large-scale movement in cession rates
The future horizon
Dark clouds?
•
Consolidation of insurers
– Top 5 insurers in 2003 had $2.9bn premium and in 2014 had $9.5bn premium.
•
Less reliance on reinsurer claims and underwriting expertise?
•
Alternative sources of funding
– Offshore reinsurers
– Institutional investors seeking higher risk/yield assets
•
Changes to remuneration model
Case study – UScession
rates
thereinsured
pricing cycle
ordinary individual
life % and
new business
80%
60%
Rapid growth in
reinsurance
Market corrections
Cession rates fall
40%
20%
0%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Correlation between attractiveness of market and reinsurance?
Source: Cession rates from Munich Re Life Reinsurance survey; market commentary from EY research
Blue skies?
• Significant re-pricing in recent years
• IFRS 4: potential to offset new business strain
• Increasing digitisation and global connectivity
• Change in product emphasis; the rise of the annuity
• Growth of direct channel
Summary
The future landscape
•
A number of dark clouds on the horizon but blue skies also
•
Mix of business may change
•
Volume growth has been strong, as is underlying need for risk
transfer and value add services
•
Australian market remains attractive at global level
What can reinsurers do?
•
Pricing discipline in the face of competition
– Aligning break-even points
– Re-aligning definitions and practice to price (and vice versa)
– Choosing segments of the market to target
•
Capital efficiency to stay ahead
•
Explore direct opportunities where insurers choose not to play
•
Promotion of ‘value add’ activities; harnessing global resources
Questions, discussion, comment