Vigorous in Canada despite a highly concentrated market

By Alain Thériault | June 27 2007 08:37PM

Ever since Employers Re Corporation (ERC) decided in 2004 to halt reinsuring any new life insurance business in Canada, the reinsurance market has reached a point of concentration not previously seen: three heavyweights and two lightweights now make up the market.

Isolated in their corner of marginal players, Optimum Re and SCOR Life are nevertheless very active. And while Optimum currently holds a slight lead over Scor, the companies are not far apart.

Surprisingly, this highly concentrated sector is very dynamic. Driven by sustained growth in business in recent years, RGA Canada has dethroned Swiss Re in terms of the volume of new business. This is according to the most recent data published by Munich Re in its annual survey of reinsurance volumes and individual life insurance production in Canada in 2006 (see inset tables).

In 2006, RGA brought in $43.7 billioni in new business, compared to $37.5 billion for Swiss Re. However, between 2005 and 2006, Swiss Re experienced higher growth in new business than RGA, with a 24.0% increase compared to 19.6% for RGA.

Munich Re remains the undisputed leader, with $53.4 billion of new business conducted in 2006, although this result represents a drop of 6.4% compared to 2005.

In fact, Munich Re is the only reinsurer to have seen new business decline. The smaller players, Optimum and SCOR, saw respective growth in new business of 3.7% and 93.6%.

In addition, while RGA may not dominate its closest rival in terms of the volume of life insurance in force and premiums received, it surpasses it with respect to the growth of these two indicators.

RGA’s volume of life insurance in force of $179.7 billion constituted growth of 21.4% in 2006 over 2005. For Swiss Re, its life insurance volume of $268,677 billion represents growth of just 7.2% in 2006 compared to 2005.

The volume of gross premiums received by RGA in 2006, which totalled $417.1 million, is 11.0% higher than in 2005. The $726.5 million in gross premiums received by Swiss Re in 2006 constitute growth of 6.6% over 2005.

Munich Re, which dominates these two volume indicators, saw growth of 7.0% in its life volumes compared to 2005, with $363.1 billion in 2006. The company also received $2.3 billion in gross premiums. And while this figure crushes those of the competition (it is more than all of the others combined), it nevertheless represents a drop of 4.0% between 2005 and 2006.

In an interview with The Insurance Journal, Micheline Dionne, senior vice-president and chief actuary at RGA, expects that after a number of years of exceptional growth in new business, RGA will continue to progress. However, it will be difficult to grow at the same pace, she said.

“We’ve been experiencing vigorous growth in our new business for a number of years,” she stated. “In fact, new business increased from $24.3 billion in 2004 to $36.5 billion in 2005 and reached $43.7 billion in 2006. That translates into growth of 80% between 2004 and 2006.”

RGA is a relatively recent arrival to Canada, having launched its activities here in 1992. How did the company succeed in becoming a big player in just a few years? “Our two main competitors place an emphasis on the largest insurance companies,” continued Ms. Dionne. “We serve all insurers, regardless of size, and we target all life insurance markets: simplified issue, permanent life insurance, etc. We reinsure a great deal of universal life as well as term.”

RGA, which focuses primarily on individual life insurance, has also recently delved into the group insurance business. “This is a new initiative for us,” explained Ms. Dionne. “In 2005, we generated $21 million in group insurance, and we increased this to $33 million in 2006 (growth of 57.1%). In 2007, we hope to add another $10 million to this figure.”

Critical illness neglected

RGA has also opened the door to a return to the living benefits sector, notably in individual critical illness insurance (see inset text).

However, while the market may be preparing to gain a player in critical illness, it has also recently lost one: Optimum Reinsurance. When interviewed, André Gaudreault, Optimum’s senior vice-president, marketing, explained that Munich Re is taking over the sector.

“There is a lack of capacity in this market,” said Mr. Gaudreault. “Everyone turns to Munich Re, and we cannot compete against them in critical illness. This reinsurer is the only one who has everything in place to reinsure these types of products, so we have decided to pull out of the critical illness market. We will only retain our in-force business in the sector.”

Mr. Gaudreault also observed that today’s market places a high concentration of risk in the hands of just a few reinsurers. He pointed out that according to the recent survey on Canadian reinsurance volumes in 2006, published by Munich Re in February, the three big firms control 75% of the market. “There are billions of dollars separating the third and fourth player; there is no longer a middle class,” he affirmed.

In addition, with few new insurers in the country, the market is more mature and growth limited. For its part, Optimum Reinsurance plans to make its mark by focusing on personalized service.

The reinsurer is also targeting group insurance and more specialized markets. “We do not have the ability to reinsure policies of $2 million per life insured. However, we can distinguish ourselves in group insurance, loan insurance, and expatriate health insurance,” added Mr. Gaudreault.

Net earnings decline

According to 2006 data provided to The Insurance Journal by MSA Research, the total net earnings of reinsurers dropped by almost 8.56% between 2005 and 2006. However, a few of these players actually saw significant increases in their net earnings. At Munich Re, for example, net earnings rose from $9.2 million in 2005 to $86.8 million in 2006: an increase of 843%.

Optimum saw its net earnings increase by 66.0%, jumping from $4.9 million in 2005 to $8.2 million in 2006.
RGA also did well, shifting from a net loss of $6.2 million to net earnings of $14.5 million.

Revenues in Canada’s life reinsurance industry are slowly on the rise. While data for 2005 revealed that revenues dropped 5.7% between 2004 and 2005, in 2006 these figures grew by 0.91% over the year prior.
Swiss Re saw particularly strong growth in its 2006 revenues, which rose 41.29% over 2005.

And while it has withdrawn from the market, ERC continues to post revenues based on its business in-force, which grew by 33.6% to $307.1 million in 2006, compared to $229.9 million in 2005.

Optimum saw its revenues grow by 10.8%, increasing from $253.3 million in 2005 to $280.6 million in 2006 and surpassing RGA. “We have reduced our operational costs and increased our earnings,” explained Mr. Gaudreault.

At 1.64%, the growth in revenues at RGA was modest, with 2006 revenues standing at $258.5 million, compared to $254.3 million in 2005.

At Munich Re, revenues actually dropped by 6.9%, decreasing from $2.757 billion in 2005 to $2.567 billion in 2006.

Revenues and profits remain very volatile in the life reinsurance industry, and according to Ms. Dionne, they are indicators that should be taken with a grain of salt, as many factors can have an impact on revenues from one year to the next.

For example, RGA says it had to “strengthen its reserves” considerably last year to counter the effect of the low interest rates and slightly stricter reserve rules at the time.

Ms. Dionne also said that while 2006 saw a poorer mortality experience than 2005, she believes that there will be an improvement in this area in 2007.

Overall, Ms. Dionne and Mr. Gaudreault agree that it was an excellent year for Canada’s life reinsurance business. According to Optimum, almost 80% of insurance carried (risk or coverage) has been reinsured in Canada. At RGA, this proportion has reached 75% in 2007 so far.