A Securitization Primer

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.