US life/annuity reinsurance volumes jump 83% YOY

US life/annuity insurers have increased the aggregate face amount of policies ceded to reinsurers by 83 percent since 2006, to $28 trillion, according to AM Best.

Reinsurance in the life/annuity sector is increasingly being used as a risk management tool with capital management benefits a secondary factor, an AM Best survey revealed.

Many life/annuity companies view the reinsurers they do business with as business partners, and half the survey respondents stated that the terms and conditions of the reinsurance contract were a more important consideration over price and security.

The new Best’s Special Report, “Consolidation Narrows Reinsurance Options Despite Greater Reinsurance Risk Appetite for L/A Insurers” also showed that ongoing consolidation in the US life reinsurance segment has resulted in a more concentrated market, with the majority of business spread among five major players. As a result, counterparty concentration has grown as a concern for direct writers and new entrants to the life reinsurance market likely would be welcomed, according to a Jan. 17 AM Best press release.

However, the US life reinsurance market presents significant barriers to entry, which AM Best believes adds some stability to the market.

The use of captive insurance companies to aggregate and manage insurance risks has increased as well, particularly when reinsurance is not reasonably available. While collateralized facilities are available, life/annuity respondents tend to favour traditional reinsurance arrangements. Differing collateral requirements across jurisdictions can lead to market disruptions, especially if a particular jurisdiction has more favorable provisions; however, the recently agreed upon covered agreement between the United States and the European Union removes collateral requirements for EU reinsurers operating in the United States, subject to certain solvency standards being met.

According to the report, life/annuity insurers cede the majority of their business to US-domiciled reinsurers, but approximately 30 percent moves offshore. Cedants may cede business to US companies/reinsurers, but in many cases the large multinational reinsurer will cede significant business to affiliates outside the US for their own capital and tax efficiencies. Barbados housed the most business in 2016 (9.5 percent), followed by Ireland (7.0 percent) and Bermuda (4.7 percent).

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