Life | Scor deal breathes new life into the sector By creating the second largest life reinsurer in the US SCOR’s recent acquisition of Transamerica Re’s mortality business from AEGON has once again highlighted the attractions of life business to reinsurers who are trying to build multi-line platforms

The SCOR deal will see AEGON transfer boost SCOR’s market share in the United space today you have $1.8bn of liabilities and corresponding States, where it currently earns less than top be mindful of assets in cash and securities to the French 30% of its global life premiums. your infrastructure. reinsurer. Transamerica Re’s gross written “The SCOR/Transamerica Re transaction Hannover Life Re premiums amounted to $2.2bn last year, continues a trend of consolidation in the life was a niche player making it the third largest life reinsurer in reinsurance market from a US perspective until 2005 when it the US and the 7th largest in the world. that has been driven by one or two things. acquired the ING life The deal is the latest in a round of The US market is considerably smaller than it business from Scottish consolidation in the North American life was 10 years ago. A decade ago there were Re, which was in financial reinsurance market, as companies try to 10 major players, now that number is down trouble. This enabled us position themselves for a rebound after to four or five,” comments Chris Shanahan, to step in and take over an the financial crisis. Last October, Warren Executive Vice President, Mortality Risk existing infrastructure.” Buffett’s agreed to Hannover Life Re of America. However, what affect the deal has buy Canadian insurer ’s on the overall US Life reinsurance market reinsurance business. It will depend on whether SCOR’s remains to be seen, says Shanahan. “If you look at the opportunities for “It will depend on whether SCOR’s risk reinsurers to grow their businesses then risk management and pricing models management and pricing models has an non-life is growing more slowly than in the has an affect on the Transamerica affect on the Transamerica business model. past, so Life is the place to be,” says Marc Chris Shanahan Transamerica is a little unique in the skew of Beckers, Head of Benfield Analytics for business model its business was largely co-,” Europe, Middle East and Africa. he continues. The transaction excludes certain lines “If you look at some of the significant The size of the US life reinsurance market of Transamerica Re’s business including players from a decade ago, companies like is around $500bn when measured by structured solutions and fixed and variable Lincoln Life and ING Life, a lot of these ‘New Face Amount’, down from roundly annuities, which SCOR says are not in line companies were not first and foremost $1trn a decade ago. In premium terms with its “strategic orientations”. reinsurers. Transamerica was the last Life business is estimated at $40bn per “The acquisition of Transamerica of these companies and it’s offloading annum in globally. Re’s mortality portfolio will mark a new by AEGON has completed the evolution The US accounts for around half the milestone in the history of SCOR. This to a separation of direct writers versus global market and key players include transaction relates only to biometric risks, professional reinsurers,” Shanahan adds. Reinsurance Group of America (RGA), Swiss and is fully consistent with SCOR’s strategy The acquisition gives SCOR access to an Re America, Munich American, Hannover and risk appetite,” commented Denis experienced management team, a strong Life Re of America and Generali USA. Kessler, Chairman & CEO of SCOR, about franchise, a proven infrastructure and an Traditional Life reinsurance classes of the deal. underwriting system. business include Accident, Critical Illness The acquisition of Transamerica will Shanahan says: “For those of us in the and Dread Disease, Short-Term and Long-

12 reinsurance May 2011 www.reinsurancemagazine.com | Life

Term Disability, Longevity, Long Term Care, says Shanahan. longevity risk into tradable portions – similar Mortality, Preferred Lives. According to Beckers upcoming changes to the way hurricanes and earthquakes, are Mortality Risk Transfer, which is generally to the regulatory landscape could see this protected against sold on a Yearly Renewable Term basis, is trend reversed. by shifting the risk to investors via the largest line of business. “Longevity Risk and Lapse Risk take catastrophe bonds. Reinsurers are now increasing their a lot of capital under Solvency II. For Costas Yiasoumi, Chair of the LLMA’s focus on non-traditional products, which insurers going into the Life space there’s Accessibility Committee, and Head of have a greater element of financial services more risk and more awareness of the risk Longevity Solutions at , says business. These services leave most risk with so transferring the risk is becoming a big the insurance industry’s capacity to the insurer and concentrate on reserve and attraction,” he says. write longevity risk is limited and the financial relief to the client. Dealing with regulatory regimes that “establishment of a capital market investor Beckers says: “Life is a long-term differ by territory and are constantly base will contribute towards the long term business, you expect people to live over evolving is one of the big challenges faced availability of longevity solutions”. the 30 years of the contract, so most of the by Life reinsurers at the moment. “To achieve this goal, buyers and sellers total capital is in future profits. It is “We are facing a lot of regulatory change in mortality index transactions need comfort a growing market. It has been creeping up both with the introduction of Solvency II that there are recognised pricing standards, over time and it is going to continue and also in the US. We are seeing positive actuarial data and indices that both sides to grow.” developments in some states but the can use as the basis for a transaction,” Reinsurance rates are a little higher now challenge is that states are in different adds Yiasoumi. than 10 years ago, rising between 2002 and places,” says Shanahan. However, Beckers says: “The trouble 2007. But, over the last five He adds: “The question of equivalence is with transferring to the capital markets years they have been key, both the US and Europe think they have is that investors want a five to seven year relatively flat. the better regulatory system. In the end, return period but Life business takes 30 they may have to accept that both years to mature. You need to break it down are acceptable.” into chunks, but nobody has done that On the underwriting side Life successfully yet.” reinsurers face a major challenge Another challenge is the wider economic from the increase in life climate that has seen countries around the expectancies worldwide and globe struggling to recover from recession. the consequent future longevity “The economic downturn has seen a scenarios. decline in sales of many financial products. It is clear, however, that demand It is now showing some signs of recovery for long-term care coverage, disability but it is still down as consumer confidence and Critical Illness is going to increase as is lacking and people don’t feel they have the number of older people is growing. This money to spare,” says Shanahan. is an important issue for reinsurance as it is There have been some unfortunate a low frequency and high severity problem. social consequences to the bursting of the “It is property bubble with an uptick in suicides still a very The economic downturn has seen and accidental deaths following it and competitive causing a corresponding uptick in claims. market but a decline in sales of many fi nancial Although there is no definitive link there’s a reasonable products. It is now showing some underwriters say that a look through claims amount of discipline files will show some familiar stories that amongst the major players,” signs of recovery but it is still down include such details as falling property says Shanahan. as consumer confi dence is lacking prices, redundancies, over-extended However, the life reinsurance mortgage borrowing and life insurance market has been battling plummeting Chris Shanahan policies that cover the losses for remaining cession rates. The percentage of business family members. being ceded increased from 1997 to “Longevity risk is becoming too big a risk Another fear is a likely increase in 2002. But, after peaking at 61% in 2002 for the life reinsurance industry to cover, so disability claims, as according to a report for US life reinsurers, cession rates have it has to think about how much risk it can written by SCOR: “Increasing unemployment declined steadily. take on,” says Beckers. and bankruptcies as well as deteriorating Since then, life reinsurers increased rates In response to this demand a consortium consumer confidence have been found while direct rates have been flat at best. As of (re)insurers, banks and pension experts by many empirical studies as appropriate a result, cession rates plummeted, and the was set up last year to launch a campaign determinants for rising disability claims and amount of ordinary life reinsurance assumed to build a liquid trading market to transfer vice versa.” dropped severely longevity and mortality-related risks to the On the financial side deficit and other “Part of what has happened is in the last capital markets. budget issues in the US are also causing the few years the direct market has been down. The Life and Longevity Markets industry some concerns. From the early 00s the cession rate Association (LLMA) includes , “Uncertainty on the tax side is also an dropped significantly. The cession rate is , Deutsche Bank, JPMorgan Chase, issue. It’s well known that the potential down from 60% to 30% as insurers opted Morgan Stanley, Prudential, RBS, Swiss Re exists for sweeping changes to the US tax to retain rather than reinsure. Over most of and UBS. system – which could have meaningful the decade the direct market has been flat, The LLMA was set up last year to implications for life products and annuities,” but the cession rate has halved,” construct capital market instruments to slice says Shanahan. re www.reinsurancemagazine.com May 2011 reinsurance 13