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Life Reinsurers: Our Financial Re Deals Different From P-C Contracts

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Life reinsurers who offer financial reinsurance distanced themselves from their property-casualty counterparts during a session at the annual meeting of the Society of Actuaries here recently.

Additionally, during the discussion, attendees questioned why rating agencies, such as Moody’s Investors Service, New York, which was represented on the panel, do not give financial reinsurance the recognition these financial reinsurers claim the product should receive.

As part of his presentation on the panel, ‘A New World of Financial Reinsurance,’ Jeff Poulin, a senior vice president-life and annuity with London Life Reinsurance Co., Blue Bell, Pa., was one of several panelists who stated that rating agencies seemed to prefer securitizations and dislike financial reinsurance.

He noted that the “Spitzer effect” had an impact on the life financial reinsurance market, but that the market was starting to pick up again. As Attorney General, Eliot Spitzer, now New York’s Governor, investigated finite and financial reinsurance transactions to determine whether they were used to smooth earnings rather than as risk transfer mechanisms.

Poulin noted that “a lot of bad things had been done on the p-c side but the life side is a lot cleaner.” One reason, he noted, was that there are more reserve credit rules and risk transfer rules in place for life.

In 2007, the “deal flow has been really busy since the first of the year,” said Jeff Burt, vice president-marketing with Hannover Life Reassurance Co. of America, Orlando, Fla. In part, he continued, it is the result of the life insurance industry doing well, along with balance sheet growth and greater stability. The financial sector is picking up and companies are seeking to position themselves through their balance sheets, he added.

On the issue of Spitzer’s investigation of financial reinsurance, Burt said p-c financial reinsurance was not put together well. “The property-casualty market tended not to do as good a job as life reinsurers,” he said. He also attributed the difference to stronger requirements.

Both Poulin and Burt said that increased disclosure to regulators and rating agencies should really improve the situation.

The discussion also covered the convergence of capital markets with financial reinsurance. It was noted that there are more securitizations than might be thought because some are private transactions. Thus, the discussion indicated, for every 2 announced securitizations there might be 2 to 4 that are not announced.

Laura Bazer, a vice president and senior credit officer with Moody’s, said life reinsurance is “an absolute necessity and key to the functioning of the direct industry,” although she noted risks such as concentration risk brought about by consolidation of the market into the hands of only a few reinsurers. She also noted that “this is still a handshake business although it is changing gradually.”

Bazer said that in order for reinsurance credit to be given when ratings are considered, there has to be an actual transfer and it cannot be “debt masquerading as reinsurance.”

Financial reinsurance has its uses but it is important to look at how it is used, she said. The rating agencies do not prefer securitizations over financial reinsurance, Bazer added.

Burt said later in the discussion that financial reinsurers do not have the ability to go back and access a direct writer’s surplus, noting that if the business does not perform, then there is no recourse for the reinsurer.

Mel Young, executive vice president and vice chairman of the Norwalk, Conn. office of RGA Reinsurance Co., told the panel that life reinsurers are still thought of as p-c companies that are doing the same things that got those companies into trouble.

Poulin said life reinsurers need to make a better case before rating agencies and others that life financial reinsurance is a legitimate business. Hannover Life Re’s Burt said contracts that contain experience refunds based on how the reinsured block of business performs, for example, are types of financial reinsurance contracts that should be given more credence.

Poulin also noted that he is “taken aback” by the notion that the reinsurance business is “a handshake” business given the “very detailed” contracts he has seen.

RGA’s Young responded that “handshake deals are not a pejorative because handshakes have worked very well for decades.”

He also offered praise for New York regulators, saying that one of the major reasons life reinsurers have not experienced the problems of p-c reinsurers is that New York made life reinsurers adhere to tough requirements.


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