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July 06, 2003 at 08:00 PM
Securitizations Are One Of Several Regulatory Issues With Re Impact
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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.
