Life insurance securitisation is set to grow, according to Stephen Hunnisett
Use of securitisation by life insurance groups remains lower than in other financial sectors but has increased consistently in recent years and is set for further growth. Indeed, driven on by the alluring mixture of balance sheet monetisation and risk mitigation, insurance securitisation is establishing itself as a viable alternative to more traditional financing methods used by the insurance sector.
One reason why life insurers have trailed behind their counterparts in making use of securitisation is that the very nature of the insurance business makes such transactions more complex - and thus completing a deal entails more time and higher costs. If boilerplate solutions were available (with shorter lead times and a reduced need for management involvement), Moody's would anticipate a much greater deal flow in this area.
However, the complexity of insurance business has to date meant that reaching this stage is taking somewhat longer than in some other sectors. In addition, there has been a historical tendency for the insurance industry to lag behind in terms of adopting leading-edge practices in risk and capital management.
Nevertheless, issuance volumes of life insurance-linked securities have increased consistently in recent years as familiarity and understanding of this area grows. Moody's anticipates sustained growth going forwards, especially as the distinction between sub-sectors of the financial services industry becomes increasingly blurred.
“There has been a historical tendency for the insurance industry to lag behind in terms of adopting leading-edge practices
As the technology and capability to securitise life insurance improve, certain life groups are likely to integrate these tools into their ongoing capital planning. Whilst securitisation can provide additional financial flexibility, the specific circumstances of the transaction and company in question will dictate exactly how this is incorporated into the rating process.
As regards the insurance financial strength
ratings of the groups carrying out these transactions, in many cases Moody's views the aggregate impact as neutral. However, it will depend not only on the immediate impact of the securitisation on key rating factors but also on the expected longer-term influences.