How to balance growth and financial discipline in the U.S. life insurance market

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00:00:15: Why the US life insurance market is shaped by a capital-driven environment, what sets it apart from other markets globally and how re-insurers help insurance carriers navigate the balance between growth risk and complexity.

00:00:30: Welcome to RePlay By Hannover Re.

00:00:32: I'm your host Susanne Loomis And today we'll talk to Jason Rickard about The U.S.

00:00:35: Life Insurance Market.

00:00:40: This podcast is for general information only, no professional advice and a subject to change.

00:00:45: You can find the full disclaimer in our show notes.

00:00:48: Jason's good to have you here today!

00:00:50: Thank you for having me Susanna.

00:00:51: it's great to be here with you today

00:00:57: at Hannover.

00:01:04: You help clients across the US market think through capital, risk and product challenges often by combining traditional and structured financial reinsurance approaches.

00:01:16: So let's start.

00:01:18: big picture what shapes the US

00:01:20:  life insurance market right now?

00:01:22: Where are primary insurance carriers seeing momentum And where might they be experiencing headwinds?

00:01:29: Yeah, that's a great question to start with Suzanne.

00:01:31: I think most life insurance executives may start with the challenges they're experiencing and there is plenty of those but just to mention few places.

00:01:38: positive momentum over past years we've seen rise in interest rates created headway for both life and annuity products in U.S.. We have also see market emerge out pandemic while still developing mortality experience much experienced analysis shown at least some side improving.

00:01:58: Carriers within the US market with strong asset liability management capabilities are growing in the Market and there's definitely a focus on companies growing The pie of assets that they manage.

00:02:08: And along those same lines companies Are expanding?

00:02:10: The types of assets at They invest in well beyond corporate bond portfolios.

00:02:15: or seeing high investment yields On the liabilities side of the balance sheet carriers, Or stepping back from older blocks especially.

00:02:22: Those blocks have significant long-term guarantees.

00:02:25: I'm starting to prune their portfolios.

00:02:28: And they found a relatively robust market to enter into reinsurance and M&A transactions, finally maybe most notably in the

00:02:37: U.S.,

00:02:37: we've seen significant entrants of private equity companies.

00:02:40: that's created an impetus for even greater growth than operational financial efficiency across-the-market.

00:02:47: That is pretty dynamic picture with seeing here but I wonder where does it start get more difficult?

00:02:54: Yeah, as I mentioned before there's plenty of headwinds in the U.S.

00:02:57: market and maybe just to mention a few.

00:02:59: first There's always a challenge to find more ways to grow business whether that be finding new markets or new means Of distribution.

00:03:06: are new products that compete favorably on the market?

00:03:09: On the asset side companies also generally have investment portfolios That had market values below the book value which is The other side of rising interest rates that we talked about before.

00:03:20: On the product side, companies are still looking to solve the protection gap that persists despite efforts to narrow that gap.

00:03:27: And then on the regulatory side there's a rapidly changing and complex regulatory environment things like policy under discrimination rules in capital on new investment vehicles.

00:03:39: That makes it particularly challenging to quickly and innovatively grow.

00:03:44: So what would you say?

00:03:46: Are the biggest challenges you see in the market?

00:03:49: Yeah, it's hard to pull out all the biggest challenges But I think i'd break them down into three general categories.

00:03:54: on The capital side of things capital efficiency is always On people's mind complexity Of the market and then competition.

00:04:02: It's particularly important in our industry.

00:04:04: Everything gravitates In our industry towards efficiency And in the market there's continued pressure from rating agencies and shareholders To increase return on equity and reduce earnings volatility.

00:04:16: Many companies are still emerging from mispriced legacy portfolios, and those legacy liabilities are capital intensive in slow to release value.

00:04:25: And with the growth of asset-intensive products this too will require meaningful amounts of capital to support those products.

00:04:32: This really ends up resulting in a difficult balance between prioritizing the emphasis on growth providing dividends and looking to maintain earnings.

00:04:40: On the complexity side, that really falls into a few categories.

00:04:44: Product complexity balance sheet complexity and regulatory complexity.

00:04:48: carriers need to differentiate between The different product offerings if they're looking for them.

00:04:53: They still need to manage a complex web of reserve in capital requirements And potential for volatile earnings patterns from those products.

00:05:01: And then in terms of competition, it's really never been greater than the U.S.

00:05:04: market.

00:05:05: we've seen as I mentioned before —the introduction private capital and new asset managers—and they're hungry to both grow organically through

00:05:18: M&A.".

00:05:20: Yeah, I think there's several things that differentiate the US market.

00:05:24: Some things that i'd point out would be The scale and diversity of the market.

00:05:28: And different financial structures That are put into place?

00:05:31: The way that re-insurance is used in the market the significance Of shareholder focus In the market just a unique regulatory environment.

00:05:39: The Market itself in terms of Scale and Diversity Is the largest market in the world.

00:05:44: You've got wide range of products.

00:05:46: you have hundreds of Primary insurance companies with A diverse set of needs And so that really relates to the financial structures.

00:05:52: and the fact of the market is, it's really strongly shaped by financial engineering capital-motivated transactions.

00:05:58: So when you think about uses of reinsurance its a pretty broad and diverse use of reinsurances certainly reinsurance used as risk management tool but moreso than what we see in other markets Its commonly used as a capital management tools.

00:06:13: well And in terms of the regulatory environment, it's just a very unique regulatory environment with more than fifty regulators which can make navigating regulatory issues very complex.

00:06:25: So there is no shortage to address within U.S.

00:06:28: market.

00:06:29: Given the momentum and challenges between markets where does Hannover Re fit into all this?

00:06:37: Of course we want to be the reinsurer that solves those issues before as much.

00:06:44: For our clients, there's inherent risk of imbalance between their growth ambitions and the ability to meet more financial discipline-oriented metrics.

00:06:53: That's really where we believe that can add value and ensure both those objectives are readily attainable.

00:06:58: so Hannover Re's role is certainly as a strong risk taking partner but it goes beyond just helping clients manage your risks.

00:07:06: We want be able help companies grow in a sustainable and capital efficient way.

00:07:10: Ultimately, this needs to improve outcomes for their policyholders.

00:07:15: Our solution set has to involve a broad set of structured and traditional reinsurance solutions but we need to be excellent all those areas in order to be a re-insurer that our clients want to do business

00:07:25: with.".

00:07:25: Yeah absolutely!

00:07:26: And that's quite wide said of capabilities you're describing.

00:07:30: so help me break up down.

00:07:32: what exactly did mean by traditional versus structured life reassurance?

00:07:39: Sure yet traditional reinsurance solutions.

00:07:41: when we talk about that We really talked about the sharing of risk with our clients and that's always been a key part Of our relationship with our client set, it's frequently this starting point for building That relationship.

00:07:53: more specifically.

00:07:53: We talk about managing biometric risks providing underwriting expertise in data insights offering capacity For individual cases and providing clients with the ability to expand into new markets With confidence both with Hannover and through the facilitation of partnerships.

00:08:11: With structured financial reinsurance solutions, we generally cover the same risks that we just talked about with traditional reinsurance but we structure our transactions to accomplish goals.

00:08:21: they go beyond your transfer risk.

00:08:23: The focus is more on the financial and capital side of balance sheet.

00:08:28: so structured reinsurance solution can address things like regulatory required surplus in reserves.

00:08:34: also capital and liquidity needs that come from business acquisition expenses.

00:08:40: Additionally, these solutions are effective at unlocking embedded value in existing blocks of business and smoothing the emergence of earnings over time.

00:08:48: so these transactions very quickly become complex.

00:08:51: but not only that.

00:08:52: we also understand that we're not only competing with other re-insurers on market or were competing a broader financial markets to provide those structures.

00:09:03: Yeah.

00:09:04: And when would you actually lean more on one versus the other?

00:09:09: It definitely varies by clients, being well-balanced and credible in both segments is really a key to our success.

00:09:15: We won't always be able to provide both sets of solutions for all of our clients but our general approach as to have abroad range of solution available as client needs dictate.

00:09:25: it's interesting just how varied that market is with this respect.

00:09:28: where we have traditional reinsurance need Look to ensure that underlying risk are well understood, priced and diversified.

00:09:36: And where structured solutions make sense we look to insure many of those same risks or financed and optimized in the most efficient

00:09:43: way.".

00:09:44: Yeah so how do these two then work together?

00:09:47: Do they complement each

00:09:48: other?".

00:09:49: Yes absolutely!

00:09:50: We often see our relationships with clients grow out of initial traditional market relationship which is a natural point-of entry as I mentioned before.

00:09:57: But as products become more complex and capital intensive, traditional reinsurance alone isn't enough.

00:10:03: So that's where structured reinsurance becomes the right approach.

00:10:06: Where carriers' capital profile is starting to constrain what may otherwise be attractive business opportunities for them.

00:10:13: Let's dig a little bit deeper here.

00:10:15: What kind of outcomes are you trying to achieve for your clients?

00:10:20: Ultimately we want help our client companies succeed.

00:10:23: That really our simple goal.

00:10:25: One fundamental principle that we operate under is the need to have win-win solutions.

00:10:29: So certainly our clients need to succeed, but we also need you to succeed in any lack of alignment or interest between us and our clients as ultimately a recipe for client relationship not being very successful or long term.

00:10:43: We also strive to achieve client relationships.

00:10:46: where a client thinks of Hannover's both their first call And they're last call yeah?

00:10:51: We might not achieve that with all of our clients what we certainly aspire too.

00:10:54: In general, that approach has led to deeper and longstanding relationships with many of our clients.

00:11:00: And really importantly for our strategy we don't look to cover the entire US market.

00:11:04: We don't think it's an optimal strategy.

00:11:06: Instead we want focus on depth relationship with client what they do deal With Really trying understand their objectives and develop solutions where we can leverage The capabilities of anniversary in helping achieve their objective.

00:11:20: And so with all of that in mind, what's the moment that typically triggers the call to Henaveri?

00:11:27: Yeah.

00:11:27: This can come up for a variety reasons.

00:11:28: as a reinsurer we often get calls late in the process where our company has already identified an issue and needs assurance that we cannot only provide us solution but most importantly We could assure its execution within timeframes are oftentimes confined.

00:11:43: So clients need to have the confidence it will be able to successfully improve their capital efficiency Confidently help them access new distribution channels provide underwriting solutions develop solutions that up improve their earnings qualities and stability And do all that with a high level of execution certainty.

00:12:00: if we can help them manage Their financial discipline while achieving those growth ambitions, then That's when we know.

00:12:06: We're adding value

00:12:07: Yeah.

00:12:08: And you mentioned underwriting, so as the markets shift towards faster and more automated solutions how do you help ensure us grow responsibly like without sacrificing portfolio quality?

00:12:20: Well we need to do that for a Hannover Re as risk taker.

00:12:22: in our clients friction and grow faster, but they can't afford to lose the visibility in the underlying risk.

00:12:31: So what Hannover Re Can Bring is a deep multi-carrier data set experience across millions of underwriting decisions and insights into how risk actually performs over time.

00:12:41: from this we've built our underwriting engine Our automated underwriting Engine Reflex and Data Strategies that help optimize placement rates and long term risks for companies.

00:12:51: We also have capabilities for reviewing data through random holdouts and post-issue underwriting analysis that helps companies provide early warning signals where changes may be needed before small issues become large problems.

00:13:04: This experience has helped carriers push into higher face amounts, explore new customer segments and offer less tested underwriting approaches giving carriers the confidence they can lean in to innovation.

00:13:16: So Jason... What's one question you think carrier senior management should be asking their re-insurance partners more often?

00:13:25: Yeah, I think one question would be how can you help support my strategy and my objectives for the year.

00:13:31: And what risk do you think we might be missing?

00:13:34: so For us it really does come down to understanding what matters most our clients Management team and then developing solutions from that.

00:13:41: they leverage Hannover's strengths with the needs That We hear From The Management Team

00:13:46: Right, and for people listening especially in a CFO or head of product role.

00:13:51: What's one area they should be focusing on as they look ahead?

00:13:55: I think one area would be to take a hard-look at how your products perform under stress across capital earnings and liquidity metrics.

00:14:03: Market dislocations like what we saw during the pandemic where are there?

00:14:07: great financial crisis clearly do happen.

00:14:10: They will happen again.

00:14:11: The winners in this market over the long term are going to be ones that don't just react to changes of the market environment, but they design their products and balance sheets for risk management programs through those periods.

00:14:23: Thank you Jason!

00:14:24: That was very interesting a great walk-through.

00:14:30: So, today we talked about how capital complexity and competition are shaping decision-making in the US life insurance market.

00:14:38: We looked at where insurers are feeling pressure –and where opportunities are emerging!

00:14:43: Thank you for listening to Replay by Hannover Re.

00:14:45: We hope you found this conversation helpful.

00:14:47: Make sure you subscribe for more episodes Leave us a review And stay connected with Hannover Re on LinkedIn Until next

00:14:54: time.

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00:15:11: Hannover and the participants aren't liable for any damages resulting from usage of the contents on these podcasts.

00:15:17: For further information please see the show notes.