Does it make sense to avoid reinsurance?

Our planning article suggested that reinsurance was the most important building block in protection. Its effective use should be part of your planning.

All but one of the twelve largest protection insurers use substantial amounts of reinsurance. This has been their successful strategy since the 1990s, with the top insurers reinsuring 100% since c2011.

While reinsurance works for them there are two examples of insurers not using much reinsurance. This article considers both and their reasons for non-use.

Reasons for not using reinsurance

Over many years companies have suggested various reason for non-use. Here are four, at least two of which are purely assumptions:

We don’t use reinsurance. This will of course be factually true, currently and possibly historically e.g. in the case of Friendly Societies. The question here is whether this is in your members’ or shareholders’ interests. It’s simple: you owe it to them to find out.

Reinsurance won’t be available. This is unlikely. Reinsurers are finance professionals who exist to write profitable business. If you can supply this they will want to work with you.

Reinsurance will eat away at profits. This has not been the experience of the leading protection insurers, who have used 100% reinsurance since 2011 and 90% reinsurance since the 1990s. It’s easy for a pricing actuary to check the profitability impact.

Reinsurers place restrictions on us. This is true with any partnership. Reinsurers might appear demanding, but their needs are manageable — and even beneficial.

My experience is that an insurer which does not use reinsurance has not tested its assumptions recently — or perhaps ever. Effective use of reinsurance can be transformational.

Going it alone 1: Friendly Societies

Friendly Societies traditionally don’t reinsure their Income Protection business. This leaves them vulnerable to downturns in morbidity experience.

Income Protection may be less price sensitive than other lines, but some designs might leave a Society open to poor experience. It’s a risky product in any case.

Given their size, it’s rather curious.

Going it alone 2: a major insurer

Just one of the twelve largest protection insurers makes little use of reinsurance. Let’s see their competitiveness in Q2 2020 for life and critical illness cover.

Life cover

# Insurer Cost (£)
1 AIG 14.97
2 Vitality 15.52
3 L&G 15.55
4 Aegon 16.62
5 Aviva 16.87
6 Beagle St 17.47
7 Zurich 17.71
8 Budget 17.81
9 Virgin Money 20.21

Source: comparethemarket 14/04/2020: non-smoker, 40 next, 200K LTA, 25 years.

Critical illness cover

# Insurer Cost (£)
1 Zurich 88.07
2 L&G 101.25
3 Aviva 103.93
4 Beagle St 104.89
5 Virgin Money 105.00
6 AIG 119.88
7 Budget 122.15

Source: comparethemarket 14/04/2020: non-smoker, 40 next, 200K LTA, 25 years.

The Zurich paradox

Zurich is expensive for life cover. This is illustrated by the single point above and my Q4 2020 research: Zurich had few top 5 positions.

Zurich is too cheap for critical illness. Again, this was also true in Q4 2020. With or without reinsurance, this is just leaving money on the table.

I initially thought that this could be Zurich’s historic ownership of Openwork. Perhaps Zurich committed to keeping Openwork rates within a certain percentage of IFA terms? Perhaps increasing IFA rates increases overall profit?

But Zurich sold its remaining 25% stake in Openwork in 2018 so that seems unlikely.

What’s more, in Q4 2019, it sold its retail wealth management business to focus on protection. That suggests it should target a greater share of the IFA life market.

How reinsurance could help Zurich

For life cover some say that 80% of sales go to the top 3. Perhaps its mortality assumptions are too conservative, but without reinsurance competitive rates means you are implicitly competing against the knowledge and pricing of six reinsurers in the UK market.

For critical illness cover undercutting the market by 10%+ seems absurd. Increasing prices, while remaining top, would almost certainly increase profits. But even here I’d prefer not to compete against six reinsurers.

There is a better way.

Postscript. On 1 December 2020 Louise Colley (ex-Aviva) became Zurich's head of retail protection. Probably the Zurich reinsurance stance is a group position. Value-wise, it's still very odd.