#218 | The Tangled Reinsurance Web – Part 1

COVID-19 has certainly changed a lot of things and one of them is that, for the first time in a long time, the question of mortality risk exposure for life insurers is suddenly on the table. This might seem like a strange statement given that life insurers are supposedly in the business of insuring mortality risk, but mortality risk for an individual and mortality risk for a life insurer are two very different things. Every person who buys a life insurance policy is offloading their individual mortality risk onto the life insurer, but the mortality risk for an insurer is the risk that the average mortality across all of its insureds changes dramatically, even for a short period of time. It’s a virtually impossible scenario, the specter of which hasn’t been raised since the AIDS crisis in the 1980s – at least, until now.

Fortunately, all indications are that COVID is not a mortality event that’s going to sink life insurers. New data is being released every day, but it appears that COVID mortality is less than 1% of total infections and maybe even just a fraction of 1%. COVID deaths are generally marked by the existence of preexisting conditions (such as obesity and hypertension) and in New York City, for example, just under half of the deaths have occurred in patients ages 75 and older. Evidence is also mounting that a disproportionate share of the deaths has been borne by segments of the population that have been traditionally underinsured. Taken together, these 3 facts indicate that while COVID will certainly be a tragic mortality event for the country as a whole, it doesn’t appear that it will necessarily have the same impact on the country’s insured population, much less on individual insurers.

Even still, thinking about life insurer mortality exposure isn’t something we’ve had to do in a long time. Most of the risks on the balance sheets of insurers these days have less to do with mortality and a lot more to do with market interest rates, policyholder behavior and investment risk. The magnitude of an insurer’s exposure to those risks is generally related to the amount of reserves and capital. The gauge for mortality risk, on the other hand, is sheer death benefit exposure – a metric that most folks other than the carrier PR departments largely ignore. Take a look at the top life insurers by face amount of the 13 life insurers where I could easily get my hands on their full financial statements. Amounts are in millions.

CarrierTotal Life Reserves Total Face Face / Reserves
Northwestern186,233,7451,906,348,61110.24
Transamerica45,272,414950,295,08520.99
Lincoln65,230,820910,027,98613.95
New York Life80,923,751882,154,31010.90
MassMutual88,933,297715,679,8628.05
Brighthouse37,827,285524,767,14713.87
PacLife36,339,903509,873,51814.03
Guardian42,513,901402,854,0729.48
SLD20,174,504285,537,83314.15
PennMutual10,454,000146,421,73414.01
Accordia11,279,64683,887,8006.54
Symetra3,637,61261,693,7677.44
MONY3,048,39559,272,51616.96

This data tells a lot of stories. It’s fairly easy to get a feel for the kind of business a company has been selling just by looking at the ratio of face amount to reserves. Whole Life, which is generally funded at higher levels than Universal Life, results in a lower ratio and all of the Big 4 mutual companies reflect that, with ratios less than 11. Even the two highest ratios of the bunch, Northwestern Mutual and New York Life, have an easy explanation – both companies sell boatloads of term insurance, consistently ranking in the top 10 in sales. Term-centric shops like Transamerica have even higher ratios and firms with a diversified mix of business mostly skewing towards legacy Universal Life, Guaranteed UL/VUL and Term have ratios of 13-15. Firms that are overly concentrated in either accumulation IUL or high-face, older-age Guaranteed UL, like Symetra and Accordia, have low ratios.

Despite the differences in ratios, every life insurance product (and therefore every life insurer) has a lot of leverage on the death benefit. Take Northwestern Mutual, for example, with a relatively low ratio of 10.2 but a massive $1.9 trillion in death benefit on the books. Imagine that COVID-19 killed 0.5% of Northwestern’s insured population within the next year equally across all products, releasing $931M in reserves on $9.5B in death benefits for a net hit to Northwestern of $8.6B. Northwestern, with its bunker full of $24B in surplus, could handle the damage. Contrast that with Transamerica where, if the exact same thing happened, it would release $226M in reserves against $4.75B in death benefits. That would almost completely wipe out the company’s surplus capital and send it into receivership. The ratios above are an indication, if you will, of the sensitivity of the life insurer to mortality risk relative to other risks they take. Companies with low ratios tend to have more highly funded policies or policies that require more capital and therefore mortality risk represents a smaller portion of the overall risk in the product. Companies with high ratios have very little room for error in pricing mortality. They just don’t have enough reserves and capital to provide a backstop.

That’s the way it should work but, of course, there’s a twist to the story. Life insurers have long thought it prudent to use reinsurance to manage just this sort of risk. Reinsurance makes an analysis like the one above irrelevant because not all of that mortality risk is actually sitting on the life insurer’s books. Instead, life insurers shunt it off to reinsurers, big names like Swiss Re, RGA and SCOR and a host of smaller names that you’ve never heard of. But reinsurance can do more than provide for mortality risk transfer. It’s an incredibly powerful enabler for life insurance companies that can give them keys to unlock doors that an insurer might not otherwise be able to open, providing immediate economies of scale, almost unlimited opportunities to transfer risk and, in some cases, tap into massive pools of available capital. As a result, they use it like Lance Armstrong doped – strategically and in great quantities. Just take a look at the table below comparing the total face amount on the books of the life insurer and the percentage of the total face that is reinsured.

Carrier Total Face  Total Reinsured Reinsured %
Security Life of Denver285,537,833255,550,02689%
Transamerica950,295,085825,882,28087%
Brighthouse524,767,147405,278,55577%
Lincoln910,027,986676,278,68074%
Accordia83,887,80061,068,57973%
MassMutual715,679,862513,752,15772%
Symetra61,693,76734,731,48756%
PennMutual Life146,421,73473,741,22250%
MONY59,272,51624,015,32341%
Guardian402,854,072162,506,84940%
PacLife509,873,518194,789,41338%
Northwestern1,906,348,611564,057,47930%
New York Life882,154,310149,348,25117%

So if you want to unlock what’s going on at life insurers in the midst of this pandemic, you have to look beyond the balance sheets of life insurers and how much face amount is on their books to how they handle their reinsurance trades. If this is a mortality crisis, then it’s a reinsurance crisis. And as it turns out, even if it’s not a mortality crisis, then it’s still a reinsurance crisis – just not in the way you might expect.