PwC said asset-intensive reinsurance (AIR) is expanding globally, with activity remaining concentrated in the US, while dealmaking is strong in Asia Pacific, the UK and Europe.
AIR refers to a reinsurance transaction for an insurance product (usually long-term life insurance and annuity products) in which both the assets and the insurance risk are transferred from the ceding company to the reinsurer. Unlike traditional biometric reinsurance, which primarily underwrites mortality or morbidity risks, AIR supports liabilities backed by significant assets whose performance relative to liabilities is a key driver of overall performance.
PwC noted that AIR is increasingly popular because it can generate strong investment returns relative to liabilities, improve asset liability and liquidity management, and enhance capital allocation. AIR transactions can also help ceding insurance companies enhance service to policyholders and improve financial performance.
Factors driving AIR’s growth over the past decade include the shift of insurance companies from public to private ownership, the rise of hybrid asset managers/reinsurers and the growth of private credit – all pursuing investment-led insurance strategies to generate attractive risk-adjusted returns and support long-term liability management.
In the Asia-Pacific region, Japan saw a significant increase in AIR trading volumes, as did South Korea, Hong Kong and Singapore. There are also some deals in the UK and continental Europe, but future growth will depend on local and regional regulatory developments.
PwC warns that participating in these markets requires a deep understanding of the business, political, economic, regulatory, tax and operating environments of each country and region.
The AIR market has also become more competitive. Partnerships between asset managers and re/insurers have enhanced the capabilities of existing players and introduced numerous new entrants.
PwC said: “In addition, the continued growth of sidecars is enhancing access to capital for asset-intensive reinsurers sponsoring sidecars, while sidecars sponsored by direct underwriters have taken many potential transactions off the market. In addition, changes in demand for private capital and the cost of capital required by investors are further changing the contours of the AIR market.”
As the market has evolved, large reinsurance transactions have expanded beyond basic annuity products to include more complex liabilities such as life, universal life with secondary guarantees, long-term care, disability income and variable annuities.
These more complex liability types are often combined with other types of liabilities in a single transaction, requiring advanced modeling and hedging capabilities. As a result, leading AIR players are expanding their modeling, risk management and technology capabilities.
Given this growing complexity, asset-intensive reinsurers are increasingly partnering with traditional reinsurers to mitigate biometric and policyholder behavioral risks. In these arrangements, the asset-intensive reinsurer retains the investment, asset liability management and liquidity risks, while the traditional reinsurer assumes the insurance risk, allowing each party to focus on the risks of its expertise.
PwC continued: “In addition to bulk reinsurance transactions, there is also an increase in programmatic ‘liquid’ reinsurance transactions. These transactions involve new policies written by direct underwriters that are reinsured on an ongoing basis to reinsurers.
“Flowing reinsurance transactions provide cedants with consistent reinsurance capacity and enable them to enhance service to policyholders by offering new products and/or improving credit rates. At the same time, reinsurers can benefit from regular capital deployments, which can aid growth and diversification relative to closed blocks. Additionally, flow reinsurance transactions typically have shorter execution cycles and lower transaction costs relative to block reinsurance transactions.”