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Life Securitization Deals Sail Through Choppy Waters

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The life insurance securitization market appears to be holding up reasonably well despite the turmoil in the mortgage-backed securities and municipal securities markets.

Tom Corcoran, a principal in the Hartford office of Towers Perrin Inc., said the turmoil in the other markets has increased the cost of life securitization deals and reduced insurers’ ability to increase the appeal of the securities by having bond insurers wrap the bonds.

Despite those challenges, “there’s been no apparent slowdown” in life securitization efforts, Corcoran said here Wednesday during a session at the annual disability insurance conference organized by JHA, Portland, Maine, a disability insurance research, consulting and reinsurance services unit of General Re Corp., Stamford, Conn.

Although bond insurers now are facing investor and regulator skepticism, “we expect the market to get back to normal pretty quickly,” Corcoran said. “I would guess in a year or two. There is a need for the monoline insurers that will be solved by the capital markets.” Meanwhile, one alternative to getting a monoline insurer guarantee is to make sure that one of the major investors in a deal is an organization with enough prestige to give other investors confidence in the deal, Corcoran said.

Several companies have used securitization to protect against catastrophic mortality risk.

Corcoran is expecting to see new deals involving long term care insurance risk, catastrophic disability risk and a variety of closed blocks.

Life settlement securitizations are another area of interest, but one challenge there is concerns the validity of the mortality forecasts used to structure the deals, Corcoran said.

In general, however, “there’s a lot more capital than there are good investment opportunities,” Corcoran said.

Although one use of securitization deals is to share mortality risk and other types of insurance risk, another use is to find ways to cash in on the value embedded in reserves. In some cases, because of regulatory agency rules and rating agency policies, insurers may find it easier to tap the value through securitization rather than by simply taking cash from the reserves, experts at the securitization session said.

Corcoran and disability insurance experts in the audience agreed that the need to use securitizations to tap the value of excess reserves could vanish, in theory, if state regulators succeed at a well-publicized effort to shift to “principles-based reserving.” In a pure PBR system, insurers would use their own judgment to set reserve levels, rather than static formulas, and the formulas would no longer force insurers to keep what they believe to be excess reserves.

But most participants in the session laughed at the idea that a PBR system might take effect any time soon.

Even if regulators do shift to a PBR approach, they may include enough tables and formulas that insurers will continue to have problems with tapping the value of trapped reserves, Corcoran said.


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