Life & health reinsurance

Market overview

The size of the global life reinsurance business was around USD 70 billion in 2017. Most (65%) of this is attributable to the US, Canada and the UK. Ceding companies from emerging markets accounted for only 14% of global demand. Life reinsurers are increasingly diversifying away from traditional mortality business.

Market performance

The life reinsurance industry registered a 4% increase in 2017. Underlying reinsurance premium growth in traditional reinsurance areas like mortality and morbidity risk has remained relatively subdued this year with an estimated growth rate of 1% in real terms in 2017. In mature markets, slight contractions in the US and UK were set off by positive developments in Canada, Japan, Australia and Continental Europe. In the emerging markets, premiums grew by 11%, driven largely by China, with other emerging markets seeing more modest growth.

Against this background, life reinsurers have sought to increase revenues through large, individual risk transfer transactions that help primary insurers stabilise income and/or bolster their balance sheets. The introduction of risk-based capital regimes has prompted much of this activity. In Europe, for example, Solvency II has underpinned interest in reinsurance to boost available capital, reduce required regulatory capital or to economise on reserves.

Another area of growth for reinsurers has been longevity risk transfer. The availability of longevity reinsurance has become key to the pricing of annuity transactions, as insurers offering those transactions to pension funds typically look to simultaneously access reinsurance capacity to hedge at least part of the associated longevity risk inherent in these lines. Such ˝back-to-back˝ reinsurance arrangements enable primary insurers to monetise their expertise in sourcing, analysing and pricing risk, without having to commit full balance sheet capacity to hold the business for its full duration.

The operating margin of the life reinsurance industry was a mere 7% of revenues in 2017, stable compared to 2015 and 2016. The contribution from investments further declined, due to the ongoing low interest rate environment.

Outlook

Continued recovery in primary insurance should support growth in life reinsurance revenues, including a recovery in traditional renewable business. Premium growth will nonetheless likely remain modest, especially in the large advanced markets. In real terms, global life reinsurance premiums are forecast to increase by just over 1% in 2018. Premiums in the advanced markets are projected to decline after adjusting for inflation, driven by developments in the US where cession rates continue their long-term down trend and growth in the primary market remains weak. In Western Europe, where cession rates are usually lower, reinsurance premiums are forecast to grow by about 1%. The strongest contribution to real growth in the advanced markets will likely come from developed Asia.