There may be a slowdown in the insurance-linked securities market, which has provided capacity for insurers, because of current problems with monoline insurers who guarantee securities, according to an industry professional.
Chris Brockwell, director of insurance-linked securities with Swiss Re Capital Markets, New York., made his comments at a recent Investment Symposium sponsored by the Society of Actuaries, Schaumburg, Ill.
Since 1997, approximately $47 billion in worldwide insurance and reinsurance capacity has been created through the issuance of insurance-linked securities, he said during the session, “Securitization: Issuer, Investor, Regulator & Administrator.”
Of total insurance-linked securities capacity of approximately $60 billion, roughly $25-to-$30 billion is non-life and $35-to-$40 billion, life insurance related, said Mr. Brockwell.
And, he continued, new issuance in 2007 exceeded that of 2006 by 50 percent .
A slowdown may occur, however, said Mr. Brockwell, because most ILS have relied on monolines' credit enhancements to complete deals by bringing securities into the “AAA/Aaa”-rated category, he explained.
To date, he explained, this model has worked, although now investors are concerned about the monolines' exposure to subprime problems.
But it is possible that the current dislocation in the credit markets may also increase the flow of transactions where there are nonfinancial risks such as mortality or morbidity risks, he added.
The reason, according to Mr. Brockwell, is that there is a limited correlation with financial risks that could be appealing to investors who want diversification.
Securitizing embedded value in these insurance products is done by determining the embedded value of future profits, according to Mr. Brockwell's presentation.
With the embedded value financing model, typically there can be more debt and higher leverage than with the traditional financing model because of the securitization, he noted. Leverage can increase return on equity, he explained.
Jeffrey Bamundo, who works in the advisory services area of PricewaterhouseCoopers, New York, discussed how managing a securitization after the transaction has been completed is critical for the deal to be successful.
Unless care and preparation is taken, there can be unwanted difficulties in managing the business associated with such transactions, he continued.
Care must be taken, Mr. Bamundo said, to avoid unneeded complexity, communication weaknesses and lack of accountability, as well as proper handling of accounting for the business.
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