The Value of Curiosity
Liane Hirner, CFRO of VIG, has a strong belief in the merits of listening. It is a trait that has helped her navigate the shifts seen in life insurance in recent years, including macro volatility and the advent of trends
The structural shifts in life insurance have in part been fuelled by circumstance – specifically the low rates following the financial crisis – but also the eternal quest to innovate.
A Life-Re Europe afternoon panel looked at how reinsurance might be the innovation the life market is looking for – in particular how AIR might expand across Europe. David Lipovics, Senior Vice President, Managing Director, Continental Europe at RGA, has been involved in the company’s development of AIR on the continent. He said that while discussions on AIR are “nuanced” and conducted on a country-by-country basis, “which makes it challenging to have a pan-European reinsurance strategy,” there is positivity on the future direction of this market.
“I’m actually very optimistic that we’ll see more transactions on the continent,” Lipovics said, citing the precedent transactions RGA has been involved with in Switzerland and Belgium as models for future deals, as well as the over €8 trillion worth of non-reinsured reserves on the continent which remains untapped. Even so, getting the market off the ground will require some work.
Giving the insurer take on AIR – or funded reinsurance, as it is called in the UK – Radhika Ravi, Head of International Solutions at L&G, said the company has used AIR “judiciously” to-date.
“We need to ensure that we can justify the use of funded re in a way that doesn’t undermine the resilience of our balance sheet, and it also doesn’t undermine our ability to honour the obligations and policies that we’ve made for policyholders,” said Ravi.
Transactions
Getting a transaction off the ground requires care and attention. While reinsurance partners bring advantageous propositions to the table, counterparties will not always be perfect all rounders. And that means life insurers should be cautious when entering into a reinsurance deal. Ravi outlined certain “non-negotiables” when deciding on a reinsurance counterpart.
“Number one, we only place business with highly credible, highly rated counterparties. That’s very important to us. We are very clear about the investment guidelines and the plan. Any eligible assets, we have a specific capacity for duration mismatching. We ensure that there are clear limits of asset classes.”
Ravi also spoke about the relationship between insurer and regulator in innovations like AIR.
“Ultimately, I would say it’s really important for institutions to have a healthy, constructive relationship, but also some healthy tension with their regulator.”
AIR is not the only innovation that might bring new capital into Europe. Other tools include securitisation structures, special purpose vehicles and sidecars. Bringing in “new, credible, long-term sophisticated investors is, I think, in everyone’s interest,” Lipovics said, while adding, “The business case for growth is there, but the access point is very hard. Europe is typically a high barrier to entry place. I think that a sidecar access route could be quite interesting but with a European twist.”
No doubt appetite for innovation is there. And participants appear optimistic for the moment. But converting the talk into practice will be a challenge for, as the saying goes, there is many a slip between the cup and the lip.
The PRA praised
In comparison to Europe, the UK has seen a flourishing AIR market, with funded re having become a tool of significance for the local life business. At least that was the case until last year when the UK’s financial regulator, PRA, stepped in and announced, via a speech by Vicky White, Director of Prudential Policy at the PRA, that it was clamping down on the market, which in turn sparked a fire of outrage in the UK life re-insurance community.
Participants accused the PRA of proposing a heavy-handed and unworkable approach and one which could stymie a valuable resource for insurers. Some of the initial heat seems to have died down this year. Life-Re speakers suggested the PRA has now checked itself and pulled back from some of its more trenchant views on AIR.
“It [the PRA] has done a great job at raising the standards when it comes to different practices, increasing accountability, really improving the transparency of some of these collateral structures and discouraging bad practices,” said L&G’s Ravi. “There is no denying that something like additional capital charges on use of funded re would be disappointing, but it’s exactly that sort of conversation that the industry needs to engage with.”
Ravi, indeed, praised the “regulatory oversight” the PRA has brought in igniting a debate on this topic.
Building the insurer-regulator conversation is vital to allow the market to develop, added Lipovics.
However, he warned that work needs to be done for the PRA to clarify its position. “What’s particularly paralysing is sometimes the inertia that so many potential cedent companies just don’t know whether this would actually work or is going to be allowed,” he said. “So coming out with some sort of guidance on the circumstances under which it could work is important.”
No market likes uncertainty – and the same applies to AIR.
* Note: this article was written prior to the PRA’s April announcement on funded re.
