Securitisation of term life reserves should not slow down despite proposed changes to Regulation XXX, the rule that governs the reserves. Speakers on a panel at the Insurance and Risk-Linked Securities Conference in New York on June 21 predicted that further XXX securitisations are to come.
Regulation XXX requires life companies to hold reserves for term life insurance well above levels deemed appropriate by actuaries and rating agencies. A handful of companies, including Genworth, Legal & General, Scottish Re and Protective, have looked to the capital markets to help fund redundant XXX reserves.
At the conference, Steven Schreiber, principal and consulting actuary at Milliman, predicted that there will be more XXX securitisations this year.
"As more deals get done, it gets easier to do more deals," he said. "There has been a fair amount of activity, but less than I would have predicted two or three years ago after Genworth did its first deal [in 2003]. Some companies are sitting on the sidelines, and they may be saying: 'The reserves are so redundant that regulators are going to have to fix it.'"
A principles-based approach is being considered by regulators, but this would take a long time to implement. However, an interim measure proposed by the American Council of Life Insurers may be adopted soon. This measure would reduce mortality assumptions. But Schreiber believes this would not reduce the number of securitisations.
"The potential impact is that we may see a 15% to 20% reduction in reserves, but there is still significant redundancy," he said. "If the solution does get adopted, we will actually see more securitisation activity. Those on the sidelines will see that the problem is not going to go away." He added that the measure would only apply for new business starting in 2007.
Schreiber also predicted that the first securitisation of AXXX reserves will happen soon. Regulation AXXX covers universal life insurance, which includes secondary guarantees. This type of life insurance is more complex and policyholders can vary their premiums. It is also not so clear that AXXX reserves are as redundant as those under Regulation XXX.
But Schreiber believes investment bankers will find a way to get an AXXX deal done. "I think there will be one done this year, but I said that last year as well," he said. "And after the first one or two are done you will see these really rally out."