The directors pointed out instances in which life and health reinsurance profits have counteracted losses from natural disasters
According to two Fitch directors, the life and health reinsurance market is an oligopoly (Credit: PixaBay)
Two directors at ratings agency Fitch have branded the reinsurance sector for life and health coverage an “oligopoly”.
According to a report written by Robert Mazzuoli and Graham Coutts — directors of the firm’s insurance ratings business — the level of market concentration in the sector favours a handful of companies and results in a prohibitively high barrier of entry for new players.
The two pointed out Munich Re, Swiss Re, Hannover Re and SCOR as four leading players that benefit from the state of the market, but said the vast majority of it is held within the hands of seven reinsurance companies.
Their report said: “In contrast to the property and casualty reinsurance (P&C Re) market, the life and health reinsurance (L&H Re) market is characterised by an oligopolistic structure.
“Fitch estimates that the top seven players control almost 90% of the market, with the top four controlling 50%.”
Why does the life and health reinsurance market have such a high barrier to entry?
According to Mazzuoli and Coutts, the concentration of the L&H market is a result of the long-term relationships built between its giants and the primary carriers in the market, along with the risk data they’ve accrued along the way.
While P&C Re treaties are generally renewed annually, L&H Re treaties more often than not span various decades.
“L&H Re mostly consists of tailor-made treaties accommodating the special needs of clients, with whom relationships take years to build,” the report added.
“Risk management can often rely on internal databases which are not easily copied.
“As a consequence, pricing in L&H Re is less important than in P&C Re – underwriting capabilities, product innovation and distribution strength are key differentiating factors.”
How does concentration in the life and health reinsurance market benefit leading firms?
While the global P&C Re market is volatile due to the impact of natural catastrophes on earnings, the L&H Re market — which has its earnings dictated by healthcare needs, life expectancy and social welfare — has stayed relatively stable in comparison.
Mazzuoli and Coutts wrote in their report that reinsurance firms diversifying their business between the two sectors benefit from a better solvency ratio, and past instances show L&H Re profits can buoy up a portfolio hit by natural catastrophe losses.
“As biometric risks are largely uncorrelated to property and casualty risk, solvency regimes take into account a diversification benefit for underwriting both types of risks,” their report said.
“In years with heavy natural catastrophe, losses such as 2017, L&H Re earnings helped to protect the balance sheets of reinsurers, so that no recapitalisation was needed.
“In 2017 and 2018, Swiss Re also suffered losses in its corporate solutions segment, which covers the primary insurance business with industrial clients, making the L&H Re profit contribution even more important.”
Fitch predicts that the L&H Re market will grow at an annual rate of 2% over the next two-to-three years in the US and Europe, with a higher forecast of 4% for Asia, which it considers under-penetrated.