Grasping the role securitizations can play in the life insurance and reinsurance markets can be facilitated by answering some fundamental questions.

Here are a few important questions market followers should ask:

What is the role of a reinsurer in a securitization?

Making the model work will require a new level of cooperation between primary companies and reinsurers. Primary companies will need to standardize products and upgrade their IT infrastructure to make the products more “securitization friendly.” This may require new policy terms and sharing data at more granular levels. In exchange, reinsurers will need to share any economic benefits in a transparent way through lower prices.

The model also requires that larger reinsurers educate regulators and potential investors, spend research and development money to optimize the structures, and allow prototypes to be copied by others as everyone gains with increased efficiency.

As in other securitization markets, some larger players will do their own transactions. Others will sell the raw assets to another party who will bundle them. In either case, the ultimate risk/reward will go to capital markets investors.

Should I sell a closed block or do a securitization?

Either solution could work, depending on the company’s strategic and financial needs. Selling a closed block means a more complete exit from a line of business than completing a securitization. Although the cost of funds used in sale transactions may be higher, the buyer will usually take on all obligations of the block, including administration, thus providing a more holistic answer for a company that wants to monetize embedded value and eliminate ongoing administration.

On the other hand, an embedded value securitization typically may result in a lower cost of funding to the seller. However, in exchange, investors generally require the sponsor to maintain the risk of ongoing administration, certain other non-insurance risks such as lawsuits targeting inappropriate sales, large policies and asset-management responsibilities. The company also retains any upside in the block after the notes have been paid off and, therefore, any benefits of scale, if strategically important.

Are there real economic benefits from securitization?

Undoubtedly. Just look at banking industry results.

By selling risks to investors, insurance companies will no longer need to hold as much capital. Furthermore, being able to write more new business for each dollar of capital can affect financial returns dramatically.

If the industry can share these economic benefits with clients, increased market demand could result. A look at current credit card or mortgage rates shows they are far lower than if there was no securitization.

Who invests in securities?

The beauty of a securitization is that it can match investors with particular risk appetites–hence return hurdles–to the appropriate securities.

Some notes have little risk and tend to attract large money managers or even financial guarantors such as Ambac, XL and FGIC. Other securities involve more risk and are purchased by asset-backed securities investors or sophisticated hedge funds. In general, if a sponsor can describe a risk accurately, then there should be investors who will provide a price.