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Securitizations Are One Of Several Regulatory Issues With Re Impact

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Securitizations Are One Of Several Regulatory Issues With Re Impact


The tantalizing potential for the growth of life insurance securitizations is one of several pertinent matters regulators are looking at that could impact the life reinsurance market.

Other issues to watch out for include efforts to harmonize property-casualty and life and health reinsurance statutory accounting rules, except where there is a compelling reason to differ. Also, changes to life risk-based capital requirements for modco reinsurance will affect life insurers that are ceding business.

Perhaps the most significant discussions relative to life reinsurance, however, were “big picture” presentations made during the summer meeting of the National Assocation of Insurance Commissioners, Kansas City, Mo., before its Insurance Securitization Working Group.

The group has spent a significant amount of time and effort over the course of the past two years developing a complete (and controversial) regulatory framework for property-casualty reinsurance securitizations. In New York, the attention turned to what had hitherto been a footnote–life insurance securitizations.

Omar Chaudhary of Goldman, Sachs & Co., New York, presented regulators with an overview of the concept of life securitizations, and also laid out details on the structures of two transactions closed in recent years–setting forth specifics on the deals and their development.

Chaudhary discussed the motivations for issuers of life insurer securitizations, including the ability to raise capital against embedded value, monetize future fee streams, and hedge against mortality and longevity risk. He added that the technique was first applied in the late 1980s but that interest and activity is growing.

One of the primary motivators behind the increased interest increasingly is sophisticated actuarial modeling and risk analysis tools. For example, actuaries can model a closed block of life insurance business against multiple projected changes in lapse rates, mortality improvements or shocks, interest rate changes, equity market changes, and combinations of these and other factors.

These complex modeling techniques allow potential investors, and rating agencies, to assess the risks associated with the securitized deals with enhanced confidence.

Coupled with the availability of insurance wraps that guarantee principal and interest on the securitization debt, the capital market interest in the risks is growing.

Other factors that may encourage market growth include investor demand for diversification and yield, general pressures on capitalization for insurers and hardening reinsurance markets.

Regulators are now gathering more information on life insurance securitizations.

In addition to the Goldman Sachs presentation, the working group also received a white paper drafted by the International Association of Insurance Supervisors. The regulators asked that comments on the paper be submitted to the group soon, as well as on the Goldman Sachs presentation.

Specifically, they asked that industry and others consider whether or not any changes in current valuation and accounting rules, or model laws, might need review in light of the developing securitization market.

The American Council of Life Insurers, Washington, has a committee considering the issues, and the regulators are sure to hear from them over the summer.

Additionally, the Statutory Accounting Principles Working Group has a subgroup on reinsurance whose raison d?tre is to consider any accounting differences between the life and property-casualty industries and make recommendations for change.

In New York, they confirmed and finalized changes that will make the 90-day nonadmission rule for reinsurance recoverables currently in force for property-casualty accounting also apply to life and health reinsurance.

However, other differences between the two types of reinsurance are proving more complex to parse. Look for a series of recommendations out of that group to the parent committee over the next year.

And, as always when it comes to statutory accounting, the devil is in the details. Seemingly small and insignificant changes can have large impacts.

The details will certainly matter for a pending change in the life risk-based capital instructions. After debate last year, the Life Risk-Based Capital Working Group released instruction changes this month to implement a decision finalized in December 2002, applicable for 2003 financials. The changes shift the treatment of modco reinsurance for ceding life insurers. The new treatment will adjust total adjusted capital for the portion of a dividend liability assumed by reinsurers.

Essentially, the proposal will cut the credit in half, decreasing the resulting risk-based capital significantly for insurers with large modco treaties.

is an expert in insurance legislative and regulatory issues with over a decade of experience following NAIC issues. She is vice president for Financial Industry Services at MultiState Associates Inc. (, a provider of state and local government relations and legislative and regulatory tracking services.

Reproduced from National Underwriter Edition, July 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.


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