Market not competitive enough says A.M. Best, but reinsurers disagree

By Alain Thériault | November 26 2009 06:41PM

Credit rating agency A.M. Best says the Canadian life reinsurance market is ready for new players. Not only is competition is weak, but the Canadian reinsurance market is overly concentrated. The reinsurers contacted by The Insurance Journal disagree. They contend that although the market has a small number of players, the competitive environment is lively, and motivated smaller players are offering alternatives.

 In a special report presented in Toronto in September, Robert DeRose, Vice President, reinsurance ratings at A.M. Best, said that over the longer term, demographic trends should bolster life reinsurance in Canada. These trends favour savings products and insurance tailored to the longevity of Canadians.

The bad news: the Canadian reinsurance life market is too concentrated and not competitive enough, A.M. Best says.

In the ‘90s, Employers Reinsurance Canada (ERC) successfully carved out a choice place in the Canadian life reinsurance market. Notably, it developed solid expertise in critical illness products.

"With the exit of Employers Re in 2004, direct writers have faced a life reinsurance market characterized by limited competition leading to fewer choices of reinsurers or prices. The consolidation experienced in recent years created significant counterparty concentration risk for Canada's direct writers," the A.M. Best report notes. Over 90% of this market is controlled by three players: Munich Re, Swiss Re and RGA Canada.

A.M. Best outlines what it sees as the strengths of these three companies: RGA has increased its market share the most following the withdrawal of ERC. Swiss Re is a calm power with a solid, longstanding business portfolio in force. Munich Re offers greater product diversity than its main rivals.

The ratings firm also emphasizes the strength of the smaller players: Scor Global Life expanded its presence in Canada in 2008. Optimum RE maintains a solid niche position and the newest player, Aurigen, quickly made its mark by signing a large contract with an insurer.

Even so, A.M. Best stresses that there is room for new players in Canada. The company predicts that insurers will need additional players to meet their liquidity needs. New arrivals could also lower prices, A.M. Best says.

Reinsurers' response

Unlike the three biggest players, which did not return The Insurance Journal's calls the smaller reinsurers agreed to comment.

André Gaudreault, Senior Vice President, development at Optimum Re,  says the playing field is fine the way it is. "In the United States, there are barely a dozen life reinsurers in a country ten times bigger than Canada. By comparison, keeping the same proportions, there could easily be 50 reinsurers in the United States," he says. 

In addition, the proportion of reinsured business in the United States shrunk constantly in the last five years. "If there's a market that's not competitive, it would be the United States," Mr. Gaudreault counters. The reverse is true in Canada, where insurers assigned more business to life reinsurers in 2008 than in 2007, he continues.

He then turns to the topic of competitiveness and price flexibility. "If we have a market without competition, why are insurers assigning more risks than before? It's because life reinsurance is still priced very well in Canada. We give quotes on all types of business and we have to cut our margin significantly to remain in the game. That's a sign of a competitive market." 

Market concentration results more from insurers' habits than from a lack of reinsurers, Mr. Gaudreault explains. Several insurance companies instinctively assign their business to the same reinsurers. The smaller players have the capacity to take on more business, he says, adding, "Alternatives are out there!"

SCOR has been actively making acquisitions, the latest being Revios and Excel Re. The France-based reinsurer does not consider the Canadian market sluggish. "No one would object to more competition sparked by the arrival of a new player, but there are already many companies in the Canadian market," says François Lemieux, Executive Vice President and Chief Actuary at the reinsurer's subsidiary in Montreal

The market is dominated by large reinsurers, Mr. Lemieux admits. "But there is still room for the smaller ones. All insurers are once again wondering about risk management. They are seeking diversification. We want to meet this need by pursuing our growth in all long-term products: life, disability and critical illness, both individually and in group. We don't necessarily want to see a new player swoop in and take this business out from under us!" 

Another advantage he brings up is financial solvency. Standard & Poors boosted the financial solvency rating of his company's parent corporation from A- to A, while A.M. Best left the rating unchanged but upgraded the reinsurer's outlook from stable to positive. "We were affected very little by toxic investments and we have considerable liquidity. Our defensive strategy served us well," Mr. Lemieux says. 

At Aurigen Re, Yana Gagne, Director, business development, agrees that the Canadian market is competitive enough, but there's always room for new players, she says. The company entered the Canadian market one year ago.

"We wouldn't have entered the market if we didn't feel there was a desire and a need for a different reinsurance player. There's still room in Canada. The bigger ones have the vast majority of the life reinsurance market in Canada, over 95%. But, I don't think that the smaller players have smaller shares because the market view is that three is enough. There are different reasons why you would choose one reinsurer or another."

Ms. Gagne points out that niche players are prospering, but she would not describe Aurigen as a niche player.

"Our share is smaller because we've been in the market for only one year. You don't become a big player overnight. It's a relationship business. You need to prove your added value if you aspire to be a significant player in the Canadian market."

Offering individual life reinsurance exclusively for now, Aurigen Re saw an opportunity to enter Canada when ERC bowed out. The Aurigen executives, including Ms. Gagne, previously worked at ERC. "We built, in about four years, a company that had 20% of market share," she recalls. Ms. Gagne confirms that the company currently holds a strong competitive position. "We're winning business. It's very exciting, to build it from scratch. I think we're having an impact in the market. We hope to be a major player."