RGA: Looking at the brighter side of reinsurance

Reinsurance is facing challenging times in property/casualty (P&C), but the environment for life & health reinsurance is looking increasingly attractive.

It’s an enviable position for RGA, “the only global reinsurance company to focus primarily on life- and health-related reinsurance solutions”, a company loaded with extensive historical data and the expertise to attract new business, according to its CEO, Anna Manning.

Based in St. Louis, Missouri, RGA holds approximately $3.2 trillion of life reinsurance in force and assets of $58.1 billion as of June 30, 2017. And Manning sees enough opportunities in the market to grow the business further.

“We see very strong opportunities in our organic business, where our clients—the insurance companies—sell a policy and we reinsure the risk in some form straight from day one,” Manning says.

“On in-force block transactions, we also see a healthy pipeline in many different regions of the world,” she adds. “The UK, for example, shows tremendous demand for risk transfer solutions with respect to longevity exposure on pension plans.

“In North America we see a strong demand for helping clients to better balance their balance sheets, and restructure some of their risk that has become non-core or non-strategic.”

A benign environment

RGA may be the only global life & health-only reinsurer, but it is not the largest player in the segment (see box). Swiss Re is the market leader with revenues at $13.06 billion as of 2016-end, according to the RGA Investor Day 2017 presentation. Munich Re follows with $12.41 billion, while RGA took the third position with $11.40 billion.

However, unlike Munich Re, RGA has no direct life insurance operations, which the company sees as a potential competitive advantage.

“This positions us quite well to be a valuable partner to our life insurance clients, working together to create solutions,” Manning says.

RGA’s main competitors to its organic business are European composite reinsurers. On the M&A side, meaning the in-force block transactions, competitors include not only the European composite competitors, but also a broader group of players. These can be private equity-backed reinsurers as well as some insurance companies which are also active in reinsurance, for example in the pension market.

While rates in P&C are particularly under pressure in the broker-driven market due to higher competition and transparency, the operating environment for RGA is more benign.

“For most parts of our organic business, brokers do not have an active role to play,” Manning says.

“The biggest part of our organic business is individual mortality risk. If we think about the US, Canada, the UK, and other large markets around the world, brokers typically do not participate in organic business.”

Brokers have more influence in the group businesses, for example, group health risks, group life risks, and in RGA’s in-force transaction businesses, Manning explains.

But, in general, prices play a less prominent role in life & health reinsurance than in P&C, where products tend to be more commoditised.

Capabilities, skills, execution and expertise play a bigger role in life & health reinsurance, Manning suggests. “It’s that combination package,” she says.

This is where RGA believes it has a competitive advantage. To successfully operate in life & health reinsurance, a company needs access to large datasets.

“We have one of the largest mortality blocks. We have in excess of $3.1 trillion of risk globally on mortality. That allows us to gain very deep and segmented insight,” Manning explains.

The capabilities and the expertise required to be successful in the life & health reinsurance business provide some natural barriers to new entrants.

“It’s not just the size of the dataset, you need a lot of rich historical data,” Manning notes.

The long duration of contracts is what makes life & health reinsurance different from the P&C renewal-focused business, which can be driven by events such as hurricanes, changing pricing and terms and conditions, and giving market players a relatively fast feedback loop. In the mortality business, the consequences of underwriting actions and underlying assumptions may become clear only 40 or 60 years later, Manning notes.

The long-term character of the life & health business may discourage new entrants.

“We haven’t seen any new life & health reinsurers come into the market for our core reinsurance business, long-term mortality risks. In fact, what we’ve seen in the last couple of decades is a lot of consolidation of the life & health reinsurers,” Manning notes.

Pricing plays a role in life & health reinsurance, albeit not a central one.

“You must provide a fair price,” Manning says, “but capabilities are a differentiator. In some markets, and I would point out the US as perhaps one of those, it puts you in a position where you don’t have to have the best price.

“You have to be within the price range of the other reinsurers, but sometimes you are able to charge a slightly higher price to the insurance companies in order for them to gain access to these capabilities,” she explains.

Not all rosy

While RGA is optimistic about future business, Manning admits that the primary life & health insurance market faces a few challenges: historically low interest rates squeezing investment returns, a volatile capital market, tightening regulation and political instability in some regions.

There are also distribution-based challenges driven by changing consumer needs. Primary insurers are required to adapt to a new breed of potential clients who expect simpler products and a transparent, technology-driven distribution. Companies need to build a framework that can deliver services accepted by the millennial generation, she says.

In addition, there is competition not only within the traditional life & health insurance market but also through new entrants. Manning expects similar disruptions in life & health insurance to those technology companies have created in urban mobility or the music industry.

“They are certainly interested in our industry and there is a lot of activity. I would say there has not been a lot of progress to date, but that is one of the challenges that the insurance industry faces,” Manning says. She also sees growth potential for primary insurers.

“There are large pockets of consumers in every major insurance market that are being underserved by the insurance industry,” Manning says. The millennials are part of this underserved population, and many groups are working on how to target consumers who currently don’t have any insurance but certainly need it, she adds.

Key partnerships

In order to attract these new customers, primary insurers need to engage in perhaps unorthodox ways to develop products.

“We certainly think that there will be a need for partnerships where each member brings a certain level of expertise and capabilities to create that end-to-end solution,” Manning says.

RGA may be able to add value to such a partnership around technical expertise, underwriting risk selection, access to data and product development, she notes.

A technology provider should also be included in such a partnership in order to help create a platform. The insurance company can manage and administer the contracts, Manning explains.

RGA plans to grow the business organically as it has in the past, although there have been few exceptions.

In 2009, RGA agreed to acquire the US and Canadian group life, accident and health reinsurance business of ING Group unit ReliaStar.

In 2015, RGA acquired Nebraska-based underwriting services provider, Elite Sales Processing.

“We purchased two small operations in the last 30 years in order to fill our suite of product offerings and expertise,” Manning comments.

“Other than that, all of our growth has been organic. We focus on in-force blocks as opposed to purchasing complete operations. We think that there are enough opportunities, and that is where our focus is going forward.”

An attractive proposition

Some P&C-focused reinsurers such as Swiss Re are looking for growth opportunities in life & health while shrinking their P&C operations to protect profitability in the current soft market.

The Swiss reinsurance giant envisages doing big in-force transactions similar to the one it struck with Citigroup at the end of March 2016. A subsidiary of Swiss Re Life & Health America replaced Prime Reinsurance Company as Primerica Life Insurance Company’s reinsurer on a coinsurance agreement covering a block of term life insurance policies that were in force on December 18, 2009.

The coinsurance agreement represented the majority of Citigroup’s remaining reinsurance activities with Primerica, following Primerica’s initial public offering and ultimate separation from Citigroup.

Swiss Re may also pursue transactions on the life capital side and acquire closed books in the UK, for example, where competition is weak.

Such transactions help clients free up capital to invest in other fields, CEO Christian Mumenthaler explained during the reinsurer’s August 4 first half results media presentation.

Swiss Re is not alone. After acquiring North American life reinsurance company Aurigen Capital in April, PartnerRe president and CEO Emmanuel Clarke said that the acquisition is part of PartnerRe’s strategy to grow its life and health business and expand the life reinsurance footprint in North America.