From challenge to collaboration: how reinsurers are helping life insurers overcome today's toughest hurdles

Risk management lies at the heart of every insurer's decision. For life insurers, unique challenges arise due to the long-term nature of their policies and the potential volatility associated with mortality, morbidity, persistency and financial market risks. In my role as the Global Head of L&H Structured Solutions at Swiss Re, here are the top six market trends I have seen that are driving life insurers to seek capital relief from reinsurers.

The regulatory landscape has become increasingly demanding as regulators seek to improve policyholder protections, requiring life insurers to maintain robust capital reserves to ensure financial stability. Compliance with these regulations such as Solvency II in Europe or the NAIC guidelines in the United States is paramount but can be viewed, in certain circumstances, as sufficiently prudent to diverge from an economic valuation of the risk. Seeking capital relief from reinsurers allows life insurers to meet these requirements more efficiently and also frees up capital for strategic purposes. By transferring a portion of risk and liabilities to reinsurers, life insurers can optimize their capital structures, enhance solvency ratios, and navigate complex regulatory frameworks more effectively.

Life insurers face the constant threat of catastrophic events, such as pandemics, natural disasters, or step changes in mortality rates. Reinsurers, armed with deep industry knowledge and risk management expertise, have proven instrumental in supporting life insurers through these uncertainties. The recent COVID-19 pandemic has underscored the importance of flexibility and tailored solutions to address the unique challenges faced by life insurers.

As COVID-19 spread throughout the population and has now become endemic, most people - whether or not they were immunized - will have become infected with the virus. If the preliminary studies are accurate, Long Covid and the health effects of subsequent COVID-19 infections could raise the disease burden across all populations. Further healthcare expenses for society may result from this, and insurance companies may notice related portfolio developments.

Longevity risk can pose a significant challenge for life insurers, due to uncertainty around how much longer policyholders may live. According to the UN's Population Division of the Department of Economic and Social Affairs, the number of persons aged 80 years or over is projected to triple, from 143 million in 2019 to 426 million in 2050. Given these historic changes in life expectancy and the growth in the older age population, insurance plays a vital role in the financial security of this section of society. The provision of these long-dated benefits can present challenges, with reinsurers able to play a vital role in managing longevity risk by offering their expertise in assessing and pricing these risks.

Through reinsurance agreements, life insurers can share the burden of this risk, enhancing their ability to meet long-term policy obligations. This collaboration allows insurers to mitigate the impact of increasing lifespans, strengthen risk management frameworks, and ensure the long-term sustainability of their business.

Volatile markets and economic uncertainty challenge life insurers' investments. Recent negative news impacted global economy and markets, with inflation scares, severe monetary tightening, and recession fears causing fluctuations. Market vulnerability and lack of transparent interconnections were evident in past crises. Market performance worsens during stress, increasing unexpected volatility.

Despite a growing US economy fueled by consumer spending and a strong job market, we predict a slowdown in H2 2023 due to tighter policies, which could potentially result in a mild recession. Tighter credit conditions and delayed effects of restrictive policy may contribute to this expected downturn.

By forging partnerships with reinsurers, insurers can better manage financial market risks and mitigate the potential negative impacts of volatility. Reinsurance offers several advantages compared to banking solutions or in-house management. It serves as an efficient and cost-effective alternative to traditional funding sources like debt and equity, reducing the economic cost of equity capital and ensuring stability in future earnings and dividends. In contrast, other options such as derivatives, sub-debt issuance, or internal captive solutions may lead to increased operational complexity or even financial instability.

Life insurers continue to go through a period of consolidation, restructuring and optimization. Some of these strategic reviews involve the entry into a new line of business, market, or country. Reinsurers with established presence in such lines and territories can support product development and share in the risk using their wider industry knowledge. Recent M&A activity, specifically in the US, has seen the movement of large in-force blocks which enable insurers to reinvest to grow their businesses for the future.

The insurance industry is undergoing a digital revolution, necessitating adaptation and innovation from life insurers to maintain competitiveness. Evolving digital technologies present new opportunities for risk prevention and mitigation, increasing overall resilience. Artificial intelligence and machine learning enable access to previously untapped risk groups, improving insurance, risk assessment, claims management, and personalized customer experiences through detailed and real-time data.

Investments in technology infrastructure, data analytics, and digital distribution channels are crucial but require significant financial resources. Collaborating with reinsurers allows life insurers to secure capital relief, enabling investment in digital transformation initiatives without compromising financial stability. This partnership empowers insurers to embrace digital innovations, enhance operational efficiency, and provide exceptional customer experiences.

At Swiss Re, we recognize the profound impact life and health reinsurers can have in building a more resilient world. And while the rapidly changing insurance landscape presents significant challenges, we believe there are many opportunities for growth amidst these challenges. Working with us as a trusted reinsurer is a key part of a successful strategy for managing risk, optimizing capital structure, and exploring new opportunities for expansion.

Our partnership provides you with the knowledge and support you need to overcome obstacles, seize opportunities and stay at the forefront of your industry. Let's explore this ever-changing environment and together find a future of strength and progress.