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Mike Ashurst:

Good morning, good afternoon everyone, wherever you are. Welcome to the ICMIF webinar, joined today by my colleague, Helen Chambers, who’s our deputy chief membership officer. And it’s great to have you with us in today’s webinar on, emerging themes across the life insurance or life reinsurance market. And as many of you will know, the life reinsurance market continues to evolve with changing product requirements, capital considerations and reinsurer appetites all influencing how insurers approach their reinsurance programmes. So to help us explore some of these developments, I’m delighted to welcome Darko Popovic, head of UK and Ireland Life Reinsurance at Guy Carpenter. And Darko will share his perspectives on the key trends shaping the market and some of the implications for life insurers. And then following Darko’s presentation, we’ll open the discussion to hear your questions, so please feel free to raise your hand or put them in the chat.

And after that, we’ll have opportunities to share insights and experiences with each other just either in the main room or breakout rooms. So one of the real strengths of these sessions is that opportunity to learn from one another. So I hope you’ll be willing to share your perspectives at the end.

So Darko, thank you for joining us today and I’ll hand over to you now. Thank you.

Darko Popovic:

Thank you very much, Mike. So Darko Popovic, nice to meet you all. Thank you very much for dialling into this very, very specialist topic of life reinsurance. Just very briefly about Guy Carpenter. For those of you who haven’t heard or don’t know us, we are a reinsurance specialist. So if it has the word reinsurance, that’s what we do. We tend to focus on broking, but also reinsurance advisory. And we’re part of the Marsh McLennan group, and you may be familiar with some of our sister companies. So Marsh acting as a direct broker, Mercer, who focus on investment consulting, retirement and employee benefits, as well as Oliver Wyman who tend to focus on strategy and actuarial consulting. So we’re part of that group.

And I for my sins am an actuary and focus on the UK and Ireland predominantly, but as part of that, we also tend to cover a lot of our other global markets and act as a shared service centre for those. And so we do tend to come across reinsurance themes on the life side across all major geographies and regions. And I wanted to share some of that with you today and then hopefully have a discussion further on topics of interest. I think I just want to also add that we do a fair amount of work with mutual specifically. So I have tried throughout to bring out a few mutual specific examples, but clearly we can go into more of that as required.

Now, I have assembled eight themes and I would have loved to have gone down to one or two and then spoken at length about them, but I’m afraid there are eight key themes in my view which are currently taking place in the global life reinsurance market. I know we only have sort of 20 minutes or so. So clearly we’re just going to sort of scratch the surface of each of these and obviously very happy to take questions further. But really what I want to talk through is just to touch on capital and balance sheet management as a starting point, because I do think that that probably is the most interesting theme at the moment, even more so than AI and data. We will obviously touch on some of the technology aspects, the operating model piece, which is sort of the unsung here at the moment. We will move on to product and risk innovation, touch on regulatory topics, talk about my view of how reinsurers are evolving into strategic partners, and then I’ll limit to talk about what has been happening in terms of capacity and the way reinsurance is bought in the market.

So without further ado, I think just to start with capital and balance sheet innovation, and I think if you were to go around the market at the moment and try to buy reinsurance, I think every single reinsurer would at some point tell you that they have a structured solution offering. I think that is probably really the buzzword. And I think it means different things to different people, but fundamentally it either has an asset intensive element to it or alternative capital and a structure element to it. And really, I guess the core of what we’re talking about at a high level is a shift from pure risk transfer through to something that looks and feels more like a capital optimization platform.

So certainly in the pension risk transfer space, we’ve seen an awful lot of growth on asset intensive reinsurance, particularly across UK, Asia, and the US. But I think if we think of some of the non-pension related pieces, there’s certainly been an awful lot of moving risks offshore as a strategic move rather than as a pure risk transfer mechanism. And again, use of internal reinsurance structures as well in order to optimise capital from a regulatory perspective.

And one non-asset intensive example that I have is around mass lapse cover, which is an area we’ve been very active in terms of placement across Europe, Asia, and more recently South Africa even. And fundamentally this is… I would think of this as a true structured capital optimization rather than a risk transfer piece. So for example, you have a situation where in Japan the risk based capital requirements mandate that the mass lapse risk is 30% and instantaneous mass lapse stress of 30% of all policies. In Europe, it’s 40% for retail and 70 for non-retail business. The IAS has mandated 30% for retail and 50% for non-retail for jurisdictions who follow that.

And at the same time, certain jurisdictions have zero stress at all or zero capital requirement for this kind of risk. Therefore, there is very clearly a structured solution in play here, where moving the risk from one jurisdiction to another can significantly optimise capital. Onto our second sort of key theme, and I think an awful lot has been said about data, AI and underwriting transformation. I think for my part, I’ll probably keep it brief and just say that really we’re moving from something, maybe not even actuarial judgement , but human judgement , humans making judgement to something that is a bit more data driven and more automated. I think it’s very much coming through slowly, but it is coming through in underwriting and pricing. On the life insurance side, I think we’re seeing a large move towards risk scoring as a first step in decision making, automated risk scoring, model based decisions. We’re certainly also seeing that paired with advanced analytics and predictive modelling.

And then the final point I’d talk about is this sort of real time data ingestion. I think particularly on the health side, people are trying to use AI to enable dynamic risk assessment. To give you a practical example, we have spoken with a relatively large reinsurer recently who effectively across their global programme on medical underwriting has to assess more than 100,000 applications during the course of the year, which I have worked out to be one every two minutes based on a sort of 10 hour working day. And while that in its own right is challenging but perhaps not impossible, what has happened since COVID in particular, is that the amount of data they receive per application has hugely increased. So whereas even as recently as sort of 2018, 2019, they would perhaps have 100 pages of information received as part of the medical underwriting.

They are now in a position where it’s looking more like 250, possibly even 300 pages of information received for every application of which they have 100,000 of to process during the course of a year. So that really for me is the key area where AI and associated IT capabilities are really helping reinsurers and I think ultimately insurers as well, in terms of sort of fundamentally doing faster underwriting at a more granular level and in a more scalable manner. So from an AI perspective, I think that has been really the key area we’ve seen reinsurers focus on just in terms of processing faster the ever-increasing amounts of data coming through.

The slightly more unsung hero on the technology side is possibly around the automation of operating models, and I’ve specifically kept AI off of this page just to kind of highlight that there are other things out there which also add value. API based integration is probably the key thing. And for those of you who don’t know what API or application programming interface means, it’s effectively software that facilitates reinsurers and cedants systems talking to each other.

So the example I was given was, when one goes to a restaurant, there’s usually a waiter who takes your order and effectively tells it to the chef or the cook, and when the meal is ready, the waiter then is the intermediary again who brings you the food. That I think is a sort of high level view of API based integration between seasons and reinsurers. But I think what we’re really talking about is that the provision of reinsurance services, including underwriting, is very much becoming more platform enabled, which means that they are quite simply able to… They’re more able to plug in to cedants systems rather than the cedants fully relying on reinsurer systems going forward. And as a result, clearly faster onboarding is one of the advantages of that. But also I would argue there is a lot less dependency and a lot less being locked in to reinsure systems as a result of the emergence of platform enabled reinsurance solutions. So I think underwriting and this sort of integration aspect are probably the two key trends that we’re seeing globally, in terms of interactions of reinsurers and cedants.

I want to touch on product and risk innovation because in particular we are seeing a sort of consistent growth across the globe in demand for three types of reinsurance. One is longevity covers, and I think that is predominantly driven by pension risk transfer business rather than mutual business per se. I’m not going to say too much in that one. But I do think the second one is quite important where health and health hybrid products are very much climbing up the sort of demand tree. So this is where life and perhaps wellness and health and maybe critical illness as well are combined together. We are certainly seeing a lot more demand for reinsurance for these types of products, and similarly, solutions, particularly structured solutions on non-traditional risks such as investment links or savings link products very much front and centre now, whereas only a few years ago I would argue they were sort of relatively niche type products.

We touched on mass lapse. I’ll put up an example later of financial reinsurance and funding. Collar pricing structures again is something emerging topic where perhaps cedants are more interested in giving up a little bit of profit in the long run, in order to lower the day one cost of reinsurance interesting structures, and the high net worth individual piece, again, perhaps not as relevant for mutuals, but certainly something we’re seeing an uptick in across the globe. The other lens to look at this is that we see reinsurers very much focusing more on ageing populations and solutions for ageing populations.

I think again, this probably mirrors what the cedants themselves are doing, but certainly reinsurance solutions around retirement and health and combinations of those, are very much the sort of order of the day at the moment. From a cedant perspective, I think what we’re hearing from reinsurance is more demand for cross product cover and I’ll definitely touch on that in a little while, as well as specific volatility management solutions. So again, moving away from pure risk management to look at volatility management, and then this kind of interesting development where students tend to be considering on one hand consolidating some of their treaties to gain economies of scale and then on the other hand, supplementing with smaller tactical arrangements to address shorter term challenges. And I’ve got an example of that coming later. I think all of this to say really that reinsurers are increasingly acting as partners, not just capacity providers.

One example we worked on recently is where a mutual insurer effectively moved from a relatively traditional sort of place and forget programme on the life side to place an aggregate excess of loss cover, mortality excess loss cover, across an entire book and then supplement it with per person excess of loss on specific products where they felt there was a bit more risk. And I think that seems to be the trend we’re seeing in terms of moving away from the traditional one treaty for one product type approach.

Moving on to regulators, no session on global themes I think is possible without mention of regulators. I think it’s an interesting time from a regulatory perspective globally because the overarching theme is there is definitely more regulatory discussion and convergence and key themes. I think the big asset intensive, reinsurance is sort of the headline grabbing news, but I think the reality is that actually there is emerging regulatory convergence on a number of underlying themes. And for me, probably the two most relevant ones here are around sort of general increased scrutiny of out of country, out of jurisdiction sessions. In other words, particularly where risk is moving from what is fundamentally a risk based capital regulatory environment to one that isn’t. I think certainly a lot more regulatory scrutiny on that across the globe.

And then this question of what if the reinsurance doesn’t work?

I think I’d probably summarise a lot of the current concerns of regulators across the globe through that lens. I think we certainly see a lot less reliance on credit ratings globally from a regulatory perspective and a lot more consideration of what if the reinsurance doesn’t work? What are the plans? What is the governance, the processes in place?

So certainly all of this helped by jurisdictions moving to risk-based capital, to IFRS 17, to sort of more market consistent views of the assets and liabilities. But I do think regulatory and tax arbitrage does remain on the table for many seasons, although clearly regulators seem a little bit more determined than previously to address at least some of the more obvious inconsistencies across the globe on that.

I think where this is all heading is interesting because I think we are very much seeing a strategic evolution of reinsurers and where they fit in the v.alue chain. I think if we look at that circle on the right, previously, even sort of five, 10 years ago, you would have said that reinsurers are only really there for the top bit, enhancing the risk profile of the cedants. And I think we’re increasingly seeing far more use of reinsurers now and reinsurance on the other parts of the wheel.

So whether it is accessing expertise and the basis, whether it is monetizing value enforced to obtain funding, whether it’s sort of tactical, certainly I guess the bottom line is reinsurers are becoming far more embedded in the actual strategy of the primary insurers. And interestingly, I think they’re also becoming much more embedded across the financial ecosystem. So whether it be asset origination or provision of expertise or funding downstream, reinsurers really seem to be trying to expand their role within the financial value chain. And one example we worked on recently is around the value enforced monetization, the full value chain of it actually, which perhaps went a bit further than we would have expected. And this really, for those who are not familiar with this monetization, it’s really just trying to obtain a payment on day one in exchange for passing all of their future regular premiums on a particular block of life business onto the reinsurer.

Therefore, what they’re effectively trying to do is create some liquidity and financing on day one in exchange for some future profits on a block of business. So the structure itself is not necessarily too novel, although it certainly falls into what I would call the structured reinsurance piece, but the interesting thing in this particular example was that we were then involved in the backend where the reinsurer themselves structured the cash flows, which they now receive from the cedant and repackaged those and sold that on to further downstream to other financial market participants such as investment banks and so on. So fundamentally, these cedants premiums are ultimately being repackaged now as sort of regular cash flows just like any other bond with some sort of default probability, which corresponds to the lapse risk, and are then being passed on to other market participants and investors who in many instances don’t have any direct exposure to insurance per se.

So all of this said that even something that seems relatively straightforward and insurance focused does ultimately end up becoming very much a more broader financial topic. And really, I think this links me to the next point, which is around market structure and competitive dynamics from a reinsurance perspective.

I think it’s very clear to us that over the last few years, certainly post COVID, the amount of capital that’s been dedicated for life reinsurance has grown far in excess of the inflation rate globally, and in particular third party sort of private capital we’ve sort of seen a 33% planning growth rate, but even just the traditional capital, I think we’re looking at a growth of up to 15% per year, and I regret not showing you… I have this data from 2013 onwards actually and regret not sticking that chart in because it shows even more pronounced effect of it sort of sloping up over the last sort of 10, 15 years. What’s interesting for me I think is the regional split at the bottom is actually broadly consistent across the regions.

So it’s not like one region in particular is getting all the reinsurance capacity and no one else is. It’s actually, it comes and goes, but by and large, I think that the proportion of the various blocks tends to be pretty consistent across the years. So we certainly see very large increase in reinsurance capacity for life business across the globe actually. A lot of it is coming through with a focus on asset management and the pension risk transfer business, but clearly not all of it is going into that. And actually we are certainly seeing, in addition to the asset piece, I think competition is shifting towards those with structuring expertise and those who are really able to help feed balance sheet efficiency.

I guess all of this really probably culminates in a question on why and how is reinsurance being bought nowadays. I think I alluded earlier to the sort of moving on from the place and forget approach and onto something a little bit more strategic. I think the way that looks, in our eyes at least, is certainly a little bit more thought around the structure, around negotiating power and marketing from the cedants perspective. So consolidating lots of little treaties into big ones, focusing on leveraging scale and to obtain better deals, aligning reinsurance strategy with risk appetite. I think looking at improving reporting, there’ve been significant improvements in actually obtaining views on how well a particular treaty is performing. And again, then I think focusing on alternative solutions and really trying to understand what can the reinsurers actually do for us and how might that align with what we need.

I’m going to finish up with a relatively complicated case study actually. It stems from Australia and mutual company in Australia we worked with recently, who very much were in the traditional commerce reinsurance purchasing mode. In other words, they had a mix of group business and retail business on the life side and they tended to purchase reinsurance very much either on the group business, if there’s a new scheme, or on the retail business as in when a new product was designed. And it’s probably one of the better examples I’ve seen of moving to sort of full rethink of how reinsurance is purchased. They effectively changed their reinsurance programme entirely to have a quota share across the whole piece, both retail and group business, which sort of covers the sort of standard risks in a very comprehensive manner and with a tranche-like facility such that they can increase or decrease the amount of the quota share depending on the new business they’ve sold. So that was a way of getting to that one very large economy of scale treaty, which obviously they managed to negotiate very good rates on that one and terms.

Then in order to address the various bits of tail risk, they entered into a large aggregate stop loss treaty across the whole piece on a rolling sort of three, four year basis. The benefit of it being across the whole piece is that it captures sort of diversification and really helps with the pricing. And then they used and are still using sort of short to medium term levers or tilts as we call them to really to fine tune their exposure, whether it be on specific group business that’s a bit out of the ordinary or perhaps after seeing certain trends on the retail business. And this really is, in my view, the way that all reinsurance purchasing will eventually move to, as people start sort of analysing more and trying to optimise more and really trying to leverage this sort of strategic approach that reinsurers are offering a bit more.

So I think that’s probably my 20 minutes done. I think that’s sort of all I wanted to say at this stage. Mike, shall I stop sharing and pass back to you guys? Very happy to take any questions.

Helen Chambers:

I’ve got one, Mike, while people are thinking, if that’s all right? I think obviously with us all be in low on resource. If our member insurers were to review just kind of one aspect of their reinsurance strategy this year, where would you suggest they put that resource and where do you think they should start?

Darko Popovic:

That’s a very good question. I think probably the lowest hanging fruit, I think. Which is to start at the end actually, look at the very old treaties and try and understand which of those are potentially up for re-tender or renewable. We regularly come across companies where… In fact, I’ve come across one that has had the same treaty in place for 25 years, even though they do have a cancellation option built in there, and I can assure you that so many things have changed in the last 25 years from rates through to mortality, et cetera, et cetera. You’re almost guaranteed to get a different view from a reassurer nowadays. One of the challenges I think of selling very long-term products as we do in the life sector, is that it’s easy to forget that if you start possibly bleeding a little bit of profit in year one, that can easily turn into 40 years of a little bit of profit being lost every year. Now, clearly not every treaty is cancelable or possible to renegotiate, but I certainly think it does come a point where if you have treaties, 10, 15, 20 years old, probably the easiest thing is to just A; find the document because it was probably written on paper and B; read it, just to see what are the terms there and what is… I think we often find so much focus is on the new product that’s being launched, the latest thing, and we tend to be roped into the discussions on the newest product, but I think arguably in many cases, some of the easy wins are actually looking back.

Mike Ashurst:

I have one as well just while we’re giving people time to think. So many of the members at different stages of their kind of digital and AI journeys, where are you seeing the most practical applications of AI and advanced analytics in life reinsurance today?

Darko Popovic:

I certainly think just quite simply the ability to process lots of information quickly I think seems to be the sweet spot. I mean, it’s a very kind of non-answer in a way. But I think what it means is it’s allowing insurers to keep up with customer demands. We’re constantly hearing sort of horror stories about people looking to buy products that are actually part of very significant life decisions, whether it be, I don’t know, annuities or life insurance cover or what have you, and horror stories that I think I believe the average attention span anecdotally is eight seconds. I think if a customer doesn’t buy the policy in eight seconds on the internet, they sort of go on Facebook or do something else. I don’t know what it is. But I think against that backdrop, if you think about how much information a insurer needs in order to actually sell the appropriate product, how much pressure there is in many jurisdictions to think about what the customer needs are from an insurance perspective.

I think certainly if you are partnering with a reinsurer on some of the underwriting, for me, that seems to be the sweet spot at the moment in terms of leveraging on technology to help you get the information you need in those eight seconds.

Mike Ashurst:

Wonderful. Well, thank you everyone. Thank you, Darko, very much for your time. And this webinar has been recorded, so it will be made available on the ICMIF Knowledge Hub and we will share it back as well directly with the people who attended today. We have some more webinars coming up as well within the next few weeks. So purpose-led FinTech innovation at Royal London. We have a CEO panel discussion also later this month and then early next month we have strengthening wildfire resilience with some perspectives from Canadian ICMIF members. So we’ll share all those with you in advance. But certainly again, thank you, Darko, for your time today and thank you everyone for your attendance. I hope you found it useful and we will stay in touch. Okay. All the best everyone.

Darko Popovic:

Thank you very much.

Mike Ashurst:

Thanks a lot. Bye.