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
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