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Can new capacity for variable products with guarantees arise like the phoenix out of the ashes of a badly burned life reinsurance market?

Although interviews with National Underwriter suggest doubt about a rebirth, one life actuary says that if transactions are properly structured, guarantees in variable annuities and life products can be reinsured.

Michael Pado, president and CEO of Convergence Re LLC of Oceanport, N.J., is awaiting word from potential investors on whether there is enough interest to raise capital to offer reinsurance for both guaranteed living and death benefits on variable products.

After about 10 months of work, Pado says he should know if there is interest in the project within a couple of months.

The convergence of insurance and capital markets make this a good market, according to Pado. “The risks are a commingling of policyholder behavior and capital market performance.”

If done properly, there can be a good hedging of capital market risks, he says. In order to hedge risks properly, the liability associated with the guarantee has to be modeled out in sufficient detail, Pado continues.

He says an analogy can be made between the use of options to offset risk for a reinsurer and retrocession.

What is important for properly modeling the risk associated with these guarantees is the quality and credibility of data and delivery to the reinsurer. These factors have to be monitored with frequency and in detail, Pado explains.

Details include policyholder risk characteristics such as age, sex and asset allocation within the contracts subaccounts, he adds.


Reproduced from National Underwriter Life & Health/Financial Services Edition, January 23, 2004. Copyright 2004 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.