It’s hard to believe that the life insurance business was once a quiet backwater of the financial services sector. Today it is a dynamic sector characterized by innovative financial engineering solutions designed to meet the challenges and opportunities facing an ever-wider group of stakeholders.
I can't tell you how many start-up opportunities have come across our transom over the last 12 to 18 months; so many companies see the opportunity.
At a recent Insider Engage webinar sponsored by KBRA, speakers compared notes on the changing face of the industry.
Chris Blunt, chief executive officer and president of F&G Annuities & Life described big fundamental changes around entity ownership over time: “For decades the only big distinction in the life and annuity space was stock versus mutual. Then we had the entry of private equity or credit players, followed by the creation of Bermuda side cars for new business and for capital relief. Now we're at a stage where we have mutuals sponsoring Bermuda sidecars.”
Blunt added that on more capital-intensive life and annuity business especially there’s been a move from public to private structures, through the use of reinsurance for selling or divesting businesses outright, for example.
Disruptors Move In
As in other areas of financial services, new start-ups have shaken up the life market, according to J.C. Brueckner, CEO and president for the Americas at SCOR Global Life.
“I wouldn't say that they've been disruptive in terms of taking away a lot of new business in the market. But they've really accelerated the change that's going on in the industry and in several areas.
These disruptors are going to start to connect with people in a different way, tapping into markets that the industry has struggled to enter.
“One is underwriting. They're really advancing the work on electronic health records and creating new models to use electronic health records that can be incorporated into underwriting,” Brueckner said.
Start-ups are also disrupting client engagement, finding new ways of marketing and distribution compared with traditional companies, he added: “These disruptors are going to start to connect with people in a different way, tapping into markets that the industry has struggled to enter.”
Peter Giacone, managing director for insurance at KBRA, agreed: “I can't tell you how many start-up opportunities have come across our transom over the last 12 to 18 months; so many companies see the opportunity.
“It’s a natural marriage of capital, willing to work with some very creative asset management strategies to address the challenges of the low interest rate environment, but at the same time, have an entity with liabilities that need to be managed and matched.
“Those two things coming together creates a very powerful combination, and really helps accelerate a lot of the changes that are going on in the market today,” Giacone said.
Low Interest Rates
The low interest rate environment has put a lot of pressure on the profitability of books of business, creating more demand for yield enhancement solutions, according to Gokul Sudarsana, managing director, HSCM Bermuda Management Company.
“On the buy side, there are asset focused buyers, private reinsurance and capital markets, that have the right asset origination and structuring capabilities to be able to capitalize on the illiquid, long duration nature of the underlying liabilities and provide that yield enhancement solution to the seller, whether it's via M&A or reinsurance,” Sudarsana said.
Commenting on the future outlook for life ILS, Sudarsana confirmed that it is a growing focus: “It is a diversifying earnings stream, and even the more the asset intensive business does have some diversifying element.”
However, the underlying business also has biometric risk, including mortality and longevity risk, as well as lapse risks, that are embedded in the analysis of the liability and cash flows, he added.
Product Revolution
KBRA’s Peter Giacone explained how many life companies are choosing to live with their legacy business but at the same time speeding up the new product development cycle, for example by offering lower minimum guarantees.
Even some of the smaller, mid-sized and niche players are being very aggressive about their product design features, he noted. “They’re saying, ‘We're in this for the long haul; we can't maybe do much about the book that we have, but we sure as hell can put on business going forward that doesn't dig the hole any deeper.
“I think product design is an important way forward for a company that may not have options in terms of shedding legacy businesses -- or decides not to for strategic reasons.”
Pandemic Fall-Out
COVID-19 is having a huge impact on mortality in societal terms and leaving a significant mark on the life industry, J.C. Brueckner said. But if the industry has managed mortality risk well so far, the longer term impact of COVID-19 is harder to discern: “There are a lot of factors that we need to look at - what's the impact of people not having medical care over time, or didn't have access, during lockdown to have regular checkups, or were afraid to go to a doctor's office because of fear of spread of the virus… there's excess mortality that isn't designated as COVID claims.”
The fall-out from the pandemic will affect individual life companies differently depending on their particular liability set, according to Chris Blunt. “If you've got a book of annuities, for example, [it will be] much less impactful than it will with a life book. And even within life, it depends on what your life book looks like: is it middle market people in their 40s? Is it affluent, older individuals? It's complicated.”
Blunt said pandemic has shown that when analyzing companies, either from a credit perspective or an investment perspective, it is important to examine the makeup of their existing liabilities: “I think for a while now, we've been appropriately very focused on the impact of interest rates. And I think this is reminding us that there's a lot of other factors at play when you're trying to assess a life insurance company.”
The industry as a whole has weathered pandemic quite well, underlining the strength of the industry, KBRA’s Peter Giacone said: “From a credit agency perspective, it was definitely an earnings event for the most part, not a capital event. Challenges remain, but companies that focus on the fundamentals of good risk management and solid ALM will be in a great position to take advantage of the opportunities as we move forward.”
