Life & Health reinsurance 2015 - selected themes
An outside-in perspective
Mark Prichard, RERT 2015
Palm Beach, Florida, January 2015
Introduction
Underling information sources
Today’s presentation draws upon insights from several longitudinal NMG Studies
Global life reinsurance
study
Multi-country study of
consumer risk demand
Risk Distribution
Monitor studies
Reinsurance premium
studies

Annual study spanning >50 countries, >1,000 interviews

Exploring insurer demand themes and reinsurer performance

8,000 retail customers across 12 countries

Focused on current and future buying behaviours/values

Quarterly studies of volumes & lapses by channel, product

Australia, South Africa, and UK

Annual study of reinsurance premiums / lapsation experience

UK&I
2
Presentation – key themes
Reinsurance
economics
Reinsurance themes,
Insurance trends
A challenging five years, with
long-term implications
Demand
themes
Reinsurer
responses &
implications
3
How have reinsurers
responded?
Life reinsurance economics
New business (face amounts) down 40% on 2006, in-force in
slow decline since 2009
US individual mortality reinsurance: new business/in-force (face amounts)
(2006-2013)
In-force face amounts (US$b)
7,200
1,000
6,200
800
5,200
4,200
724
683
658
3,200
600
596
505
461
2,200
445
443
400
200
1,200
0
200
2006
2007
2008
2009
2010
2011
2012
2013
Year
New business
Inforce without block deals
Source: Munich Re survey (2006-2013)
4
Inforce with block deals
New business face amounts (US$b)
1,200
8,200
Life reinsurance economics
UK new business cessions now less than half of those in 2006
UK individual mortality in-force and new business premiums
3,200
600
2,700
500
2,200
400
419
364
1,700
346
300
320
272
1,200
225
209
192
200
700
100
200
0
2006
2007
2008
2009
2010
2011
Year
New Business
Inforce
Data source: NMG Global Life & Health Reinsurance Programme, Company Accounts
5
2012
2013
New business premiums (£ millions )
Inforce premiums (£ millions )
(2006-2013)
Life reinsurance economics
Acquiring global notoriety – mounting loss provisions in
Australia reach A$2bn
Reported losses in Australia (A$m)
390
210
1,150
?

Australia has been the primary source of
poor claims experience globally (followed
by US individual mortality in 2014)

By 31 December 2013, reinsurers had
reported losses of A$1.75b (past 36
months)

Group life and TPD losses totalled A$1b
and included a systemic element

Group profitability is expected to recover,
although likely to remain challenging for
2011
2012
2013
retail portfolios
2014
Individual
Source: Reinsurer investor briefings, 2011-13
6
Life reinsurance economics
Global reinsurance margins under continued pressure
Top six life & health reinsurers’ global profits, return and expense ratio
(2007-2013)
15.2%
Profits (in US$m)
5,000
4,000
20%
17.7%
15.1%
12.3%
4,081
3,556
3,000
16%
14.3%
12.4%
12%
3,329
3,248
2,941
3,189
2,465
2,000
1,000
8.5%
4.4%
4.4%
4.3%
4.6%
4.6%
4.8%
4.9%
-
8%
4%
0%
2007
2008
2009
Profits (US$m)
2010
Year
ROE
2011
2012
2013
Expense ratio
Notes: Top six includes Swiss Re, RGA, Munich Re, Gen Re, Hannover Re, SCOR; Profits shown are before tax; ROE is calculated as a ratio of
profits before tax to net assets; Expense ratio (MER) is calculated as management expenses to net earned premiums
Source: Company accounts, analyst reports
7
MER & ROE (%)
6,000
Life reinsurance economics
PE ratios general trade in the 8-10 range and have been stable
PE Ratio Development (2009-2014)
22
20
18
16
14
12
10
8
6
4
2009
2010
Swiss Re
2011
Munich Re
2012
RGA
Source: Bloomberg
8
Hannover Re
2013
SCOR
2014
Life reinsurance economics
Reinsurer share prices have lifted from levels recorded in 2009
Indexed Share Price Development (2009 - 2014) - USD
240
220
200
180
160
140
120
100
80
2009
2010
Swiss Re
2011
Munich Re
2012
RGA
Source: Bloomberg
9
Hannover Re
2013
SCOR
2014
Presentation – key themes
Reinsurance
economics
Reinsurance themes,
Insurance trends
A challenging five years, with
long-term implications
Demand
themes
Reinsurer
responses &
implications
11
How have reinsurers
responded?
Demand themes
Hypothesis: reinsurers of growing (not declining) relevance
Aided by investments in new technology, and generational change in insurance demand patterns,
increasingly sophisticated and competitive reinsurers must surely be growing in relevance
Reinsurers
increasingly
capable
Distribution
evolution
Pricing more
compelling
New
technologies
13
Demand themes
Reinsurers have responded well to evolving demand: decision
makers indicate increased satisfaction
Business Capability Index - KDMs only
72
70
68
66
64
62
60
2009
2010
A&NZ
2011
Asia
CA
2012
Europe
NMG Global Life & Health Reinsurance Programme
14
2013
UK&I
USA[I]
2014
Demand themes
Reinsurers have also had success in engaging chief
underwriters and claims managers since 2011
Business Capability Index – Underwriting & Claims
76
74
72
70
68
66
64
62
2009
2010
A&NZ
2011
Asia
CA
2012
Europe
NMG Global Life & Health Reinsurance Programme
15
2013
UK&I
USA[I]
2014
Demand themes
Reinsurers’ servicing offer and product partnering capabilities
(design and innovation) make a comeback
Insurer’s motivation for reinsurance usage - global
94%
90% 93%
63% 66%
74%
60%
45% 48%
36% 37%
42%
7% 8% 7%
Risk transfer
Reinsurance services
Product partnering
2012
2013
Source: NMG Global Life Reinsurance Programme
16
2014
Capital & solvency
mgmt
Price below insurer
cost
Demand themes
US insurers were overwhelmingly of the view that reinsurer
services were key to the reinsurance rationale
Insurer’s motivation for reinsurance usage
93% 91% 94%
85%
71%
53%
49%
51% 48%
44%
32%
19%
Risk transfer
Reinsurance services
2012
Product partnering
2013
Note: Only factors cited by more than one Key Decision Maker are shown
Source: NMG US Individual Mortality Programme
17
2014
Capital & solvency mgmt
Demand themes
Direct is growing materially in terms of channel share,
achieving ‘above system’ growth in most regions
Direct Channel Share
(% of protection new sales)
Direct Outlook
(expected growth)
Direct
Asia
0-10%
North America
~10%
Europe
0-10%
UK&I
>20%
Australia
>25%
South Africa
>25%
Latin America
0-10%
Growth outlook:
Below system
At system
Tied
Agents
Bank
Advice
Above system
Source: NMG Life & Health Insights Programmes; NMG’s Risk Distribution Monitors
Note figures exclude Direct CCI sales
18

The direct channel share of
new protection sales has
lifted significantly in mature
markets over the past 5
years

Reported direct sales
understate total customerinitiated business

The market share of direct
channels on a policies basis
would be materially higher

Direct channels in the US
lag in relevance those in
peer markets, by perhaps 5
years
IFA
Demand themes
On-line channels increasingly important for buying life
insurance in the UK and US
Preferred channel for buying life insurance (UK, USA)
UK
100%
USA
80%
Advised
60%
40%
20%
Direct
0%
Current
Direct (bank)
Next purchase
Direct (insurer)
Current
Direct (affinity)
Next purchase
Internet comparison
Source: NMG Global Consumer Protection Study
19
Advised
Demand themes
US insurers expect On-line and Direct to grow while Tied Advice
and Broker channels are expected to decline in relevance
Insurer views of importance of current distribution channels
(Five year horizon)

Insurers have a generally bearish view on the
outlook for advisor channels, particularly for tied
agency distribution. These views were most acute
among agency mono-liners and multi-liners

Agency mono-line insurers saw direct and on-line
channels as the greatest threat/opportunity

Insurers operating multi-channel were optimistic
for the prospects of direct and on-line channels
Reducing
Gaining
Figure in () represent number of respondents
Source: NMG US Individual Mortality Programme
20
Demand themes
The ‘under-insured’ segments – of key relevance to insurer
distribution strategies in the USA

Remarkably, almost 80% of insurers
considered the ‘under-insured’ segments
key to their distribution strategies

More than 50% of insurers reported
having already ‘launched’ initiatives ,
although the scale of investment in most
cases was reported as modest

Companies mostly view the middle
market as a ‘non-advised’ opportunity
Figures in [ ] represent numbers of respondents (decision makers only)
Source: NMG US Individual Mortality Programme, 2014
21
Demand themes
Underwriting rules bases & technologies of growing relevance
Automated Underwriting Systems (AUS) - Existing and
planned installations
(% of Insurers using an AUS)
80%

Focus is primarily around accessing
underpenetrated customer segments, ie
70%
non-advice, via simplification
60%

50%
Already evidence of scope expansion to
include advice channels
40%

One-third of US insurers already using or
have plans to use AUS, a lift from 2013
30%

20%
US lags peer markets, but we are aware of
>10 live implementations
10%

0%
Canada
USA
Europe UK&I
Asia
2 in 5 insurers in the US are currently
assessing the viability of AUSs
A&NZ S. Africa
Source: NMG US Individual Mortality Programme, 2014
22
Demand themes
Reinsurers are seen as logical partners in addressing new
growth segments, underwriting algorithms are key

Almost 90% of insurers agree that reinsurers
are relevant partners for underinsured
segment opportunities

Insurers consider reinsurers’ underwriting
algorithms to be more important than the
strongly agree
agree
underlying technology platform
disagree
Source: NMG US Individual Mortality Programme, 2014
23
Presentation – key themes
Reinsurance
economics
Reinsurance theme,
Insurance trends
A challenging five years, with
long-term implications
Demand
themes
Reinsurer
responses &
implications
24
How have reinsurers
responded?
Reinsurer responses
Strategic responses from reinsurers
25
Reinsurer responses
Portfolio strategy have become more important

In response to growth challenges, revenue pool
diversification into longevity, living benefits,
group, capital solutions, and (in some cases)
medex has been a clear strategy for reinsurers

Much greater awareness about the return on
investment of global distribution infrastructure

Reinsurers are also more selective about
participation at the market level, margin outlook
and attractiveness

Still, the largest markets likely to attract new
capacity / local reinsurers. [The largest 4 markets
account for two-thirds of global production.]
26
Reinsurer responses
Reinsurers have had to contemplate new business models

Either implicitly or explicitly, reinsurers have
made decisions to change their business models

Reinsurers are technology designers providers as
well as database owners and operators. Very
different strategies have been deployed however

Value chain plays has had an impact on portfolio
strategies:

Reinsurers prepared to compete with
insurers in some markets / segments

Emerging/Mature/Post-Mature
frameworks
27
Reinsurer responses
More client centric, both new and improved capabilities

Improved customer focus:

Customer segmentation now mainstream

Expanded CRM investments, particularly
account management

Migration from 1-dimensional service models

Increasingly successful technology offerings

Broader and deeper capabilities, including pricing

Previously no more than DMTM facilitation,
distribution solutions has gained in relevance

“Reinsurers do everything these days!”
28
Reinsurer responses
Adapting organisation models

Operating costs in the large but declining
markets

Increasingly global capability management,
regional distribution

Despite regular projects on TOM design,
uncertainty remains as to a sustainable
operating cost model

Value chain strategies, more Private Equity in
nature, may require different organizational and
remuneration models
29
Reinsurer responses
Parting thoughts …
Client focus

Rewards for outperformance in client management will remain, but
reinsurers will need to battle rising expectations and improving
competition
Margins

Could this be the year that the UK moves towards a more sustainable
pricing setting (especially CI)?

Will we also see green shoots of profitability from Australian group?
Automated
underwriting

How many new AUS implementations will see around the world?

Will reinsurers be sufficiently selective, ie getting the balance right
between opportunity value and investment?
Distribution

Will we see some significant results from distribution-focused
initiatives, and will reinsurers have the necessary patience?

Will any insurers judge reinsurers as having ‘crossed the line’

A few hot markets already exist, but will we at last see traction in
markets that hold significant potential, that as yet have been hard to
unlock
Capital solutions
30