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AM Best says life and annuity reinsurance growth is being driven by capital
AM Best estimates offshore L/A reinsurance averaged 31% annual growth over the past decade, while pure life reinsurance is growing about 4% per year.
AM Best said the global life and annuity reinsurance market is well capitalized and positioned for continued expansion, with demand supported by more dedicated capital for traditional life coverage and growing third-party backing for asset-intensive annuity business.
The ratings firm said primary insurers are leaning on reinsurers as they work through higher interest rates, strong annuity product growth, and additional offshore transactions tied to differences in capital regimes. It cited offshore L/A reinsurance as a key driver of expansion, estimating it averaged 31% annual growth over the past 10 years, compared with about 4% annual growth for pure life side reinsurance.
AM Best also pointed to counterparty risk as a focus area for participants, noting that Bermuda and, to a lesser extent, the Cayman Islands have gained popularity among ceding companies due to retirement-solution demand and the use of reinsurance for capital and risk management. It added that the treatment of required capital and reserves can be less stringent than for onshore US domiciled reinsurers, but said this can increase recoverability risk where collateralization is limited in some jurisdictions.
According to the report, reliance on reinsurance has reshaped balance sheets across the sector, including higher reserve credit taken and funds withheld on US cedents’ balance sheets. AM Best said reinsurers accounted for 41% of about USD 1.61 trillion in reserve credits taken at year-end 2016, up from roughly 21%, and it flagged concerns that excess capitalization may not be sufficient under stress scenarios as alternative structures such as sidecars gain prominence in larger transactions.