Market size in USD billions
Estimated global premium income in 2013
Global life reinsurance premiums were around USD 55 billion in 2013, 70% of which originated in the US, Canada and the UK. Ceding companies from emerging markets accounted for 6% of global demand. Life reinsurers are increasingly diversifying away from traditional mortality business.
Global premiums from traditional life reinsurance covering mortality and morbidity stagnated in 2013. In advanced markets, premiums declined 0.4%, but in emerging markets they were up almost 6.1% based on strong protection sales.
Estimated global premium growth in 2013
Operating margin in the life reinsurance industry declined to 5% of net premiums earned in 2013, compared with 8% in 2012 and 10% in 2011. This was primarily due to declining investment returns from low interest rates (see box below), but also to deteriorating underwriting results. Underwriting results were adversely affected in particular by increased claims in the Australian group disability business, where claims were not only higher, but reinsurers needed to strengthen their claims reserves in anticipation of a significant rise in expected future claims.
Traditional life reinsurance is expected to stagnate in advanced economies over the next few years. Cessions will continue to contract in the US and in UK, but other advanced markets will have moderate growth in line with growth in the primary protection business. In emerging markets, life reinsurance is expected to grow by about 6%–7%. There continues to be considerable pressure on primary life insurers (including regulatory issues, the low interest rate environment and weak economic activity), which could generate further demand for capital solutions and other forms of non-traditional reinsurance.
The interest rate legacy
The forecast increase in interest rates should be a blessing for life insurers. However interest rate increases will not solve all problems. Companies roll over only a small fraction of their investment portfolios every year — typically around 10%. Portfolio yields therefore lag changes in bond market yields.
Even assuming a gradual increase in interest rates, the average insurer’s portfolio yield may continue to decline for some time. This is because the newly bought bonds have to be compared against the maturing bonds they’re replacing, which may still have a higher coupon. This would put insurers under increasing pressure to serve long-term guarantees written in the 1990s and early years of the new millennium.
And there is another challenge. Once interest rates rise, the market value of bonds will start to decline. In the same scenario of moderately increasing interest rates, the unrealised gains of the past few years will disappear while unrealised losses will begin to accumulate.
It is important to highlight that this would not impact an economic balance sheet with fully matched assets and liabilities. However, under accounting regimes with book value liabilities (eg, US GAAP), a fairly small loss on the bond portfolio can mean a significant reduction in accounting shareholders’ equity.
Strongly capitalised life reinsurers can offer solutions to cope with stressed accounting balance sheets as we work through the legacy of low interest rates.
Swiss Re’s 04/12 sigma on facing the interest rate challenge.