Reinsurers’ growing interest in securitization was evident during a recent industry conference that examined the role the capital market is coming to play in the reinsurance market.
Reinsurers are becoming aggregators of business that in turn is being securitized in the capital markets, said Craig Baldwin, co-chair of ReFocus and a member of the SOA Reinsurance Section Council of the Society of Actuaries, Schaumburg, Ill.
In an interview, Baldwin spoke with National Underwriter about developments in securitizing.
Most of the securitizations being done today, Baldwin said, are aggregations of Triple-X business. These securitizations free direct writers of redundant reserving, he added.
Securitization of A-Triple-X business, largely universal life business with secondary guarantees, is very different, he said. There is a “different nature to it” because “there is some question as to whether the reserves are truly redundant.”
A lot more modeling is necessary, and actuaries have to prove to the company’s management, regulators and investors that there is indeed a redundancy, according to Baldwin.
The reason, he explained, is that there is significantly more mortality data for term insurance than for UL with secondary guarantees, which has just come onto the marketplace in the last 5-6 years.
Baldwin said the panelists’ discussion on the issue at the ReFocus meeting suggests that securitizations are becoming easier to accomplish as they become more commonplace.
Currently, he said, the process takes 6-9 months. Although costs are coming down, in order to achieve economies of scale, transaction size usually ranges from $200 million on the low end to around $1 billion on the upper end, Baldwin said.
Reinsurers provide an important role as aggregators, he asserted, because they not only remove anti-trust concerns but also eliminate concerns over confidentiality in relation to business being ceded. For these reasons, Baldwin added, it is unlikely that direct writers would come together and create their own mutual-fund-like pool of policies as a source for securitization.
In turn, he said, it is unlikely that reinsurers will set up their own securitization facilities. Rather, Baldwin added, they will continue to rely on the capital markets to securitize ceded life insurance contracts.