Smaller players in the Canadian life and health reinsurance business are beginning to eke out market share as the large lifecos look to spread their risks away from just the dominant players. Furthermore, this move to the smaller reinsurers could also be aided by the coming change in financial reporting standards.

About 90% of the Canadian life reinsurance market is dominated by St. Louis-based RGA Reinsurance Group of America Inc. , Switzerland-based Swiss Reinsurance Co. Ltd. and Munich Re AG of Germany.

“That represents some counterparty credit risk. So, that makes for opportunities for small players in the [reinsurance] market,” says Steve Irwin, a life and health insurance analyst with A.M. Best Co. Inc. in New Jersey. “Basically, it means, [insurers] don’t want to put all of their eggs in one basket.”

Overall, the reinsurance market isn’t growing at much more than 3% a year, following the trend in the life insurance industry and demographics. This slight growth in sales is due to sales of estate planning policies to older Canadians; fewer Canadians, on a percentage basis, are insuring their mortgages, following the population trend.

Life insurers originating policies retain only about 70% of the capital risk. So, on an average $500,000 term policy, about $400,000 is usually passed on — “ceded,” as the life insurance business calls it — to a reinsurance company. It’s a $140-billion a year business in Canada, based on policy face amounts.

Reinsurance is a risk-mitigation tool to lessen the capital strain a life insurance company might experience if, for example, Irwin explains, a few $1-million policies are claimed when the lifeco might not expect it (e.g., if someone dies before their normal life expectancy plays out).

“You don’t want to have a few policies skew your results,” adds Rich-ard McMillan, a managing senior financial analyst with A.M. Best.

Alan Ryder, president and CEO of Aurigen Reinsurance Co. , a Toronto-based privately held firm, agrees that diversification of counterparty risk is a real tailwind for the new competitors in the industry — although one that’s taking time to work its way through.

Unlike the one-year property and casualty policy renewals, reinsurance renewals on life contracts tend to last two to three years, so competitors have limited windows to pitch for new business. And for a startup such as Aurigen, it’s hard work to pull business away from a sticky, known relationship.

“We have to do all the other things that we would need to do to make ourselves valuable to other parties,” says Ryder. “We have to sell ourselves, differentiate ourselves and clear the due diligence.”

However, Ryder adds, the coming transition to new accounting standards, known as international financial reporting standards, which all Canadian insurers have agreed to adopt completely by 2014, could increase the effect of perceived counterparty risk.

IFRS requires that insurers list reinsurance contracts as assets on their balance sheets, which can be charged against liabilities. Today, reinsurance is considered as an offset to a liability.

In effect, IFRS forces a greater degree of clarity to shareholders about an insurer’s exposure to certain reinsurers — and that may come under greater scrutiny.
@page_break@“It is plausible,” Ryder explains, “that an awful lot of [risk], in the minds of some people, is exposed to Munich Re or Swiss Re — more exposure than there would be for other assets on the balance sheet, such as corporate bonds, for example.”

Apart from those structural views, underwriting and market specialization are the other business drivers for the smaller players in the reinsurance market. Fundamentally, Ryder says, reinsurers such as Aurigen aim to help originating insurers achieve as much as possible in the way of returns with the capital they have, with as little risk as possible.

“A fair amount of what we do,” he says, “is in deal structuring that is designed to impact companies in different ways, so they can achieve specific ‘de-risking’ or capital-management strategies. Beyond that, it’s complex.”

Montreal-based Optimum Re Insurance Co., a privately held company that reinsures about one million life policies in North America, specializes in out-of-country health reinsurance for Canadians who are likely to use U.S. health services.

Says Serge Goulet, the firm’s senior vice president of operations: “This line of business is for whenever snowbirds travel to the U.S., for example. They’re not covered by [the Canadian system] there, so they take personal or group travel insurance. And we are behind those insurers in Canada to provide reinsurance capacity and knowledge.”

Although major insurers have their own medical underwriting teams, Optimum adds another layer of medical underwriting expertise for the larger face-value policies that Optimum reinsures.

Optimum will also provide a second opinion on claims adjudication, which means it can help direct underwriters determine if a policy is valid or not, due to Optimum’s greater access to historical claims experience than some of its clients.

Optimum shares about 10% of Canada’s reinsurance market with France-based reinsurer SCOR Group and Aurigen.

Two types of general reinsurance contracts exist, and all life insurance companies use both types, according to A.M. Best. Under the first type, lifecos sign contracts —“treaties,” in insurance parlance — with reinsurers, who take on any financial risks after a certain dollar amount for all policies.

In facultative arrangements, the second type of contract, lifecos will reinsure individual policies — usually because the policy has a high face amount for an individual or a special medical case.

In either case, the lifeco uses reinsurance in order to be able to sell a policy to meet a client’s needs, even though, says Irwin, its “capital base will only allow [it] to retain a certain level of risk as part of the risk models and [its] process.”

Ironically, a couple of years ago, it looked as if the life reinsurance market might see a new opportunity to reinsure the huge business of segregated funds with guaranteed minimum withdrawal benefits, which was growing globally at the time.

That growth has slowed, and now there isn’t a reinsurer that would want to take on that business. Most seg fund products are not profitable today — and have not been since the global drop in equities prices in 2008. Those GMWB policies are costing a lot of money, and reinsurers don’t want to take on the costs.

Although some of the larger reinsurers were developing products for that market several years ago, Irwin says, there just isn’t the appetite today: “There’s certainly the demand for it, but there’s limited interest from reinsurance for these seg funds because of the risks involved and some of the pricing concerns.”

Very little of the seg funds business was ever reinsured. In comparison, says Ryder, about 10% of group life insurance and about 50% of critical illness and disability insurance is reinsured. IE