Securitizations Under New Scrutiny

Data quality and risk selection are among the factors A.M. Best will examine when determining what impact securitization transactions will have on the financial strength ratings of participating insurance companies.

The Oldwick, N.J.-based agency issued a set of guidelines today as to what analysts will look for when trying to gauge the impact a securitization or monetization transaction will have on the sponsoring insurance company.

“Within these analyses, A.M. Best takes into consideration the structural integrity of the transactions and the analytical rigor applied by various experts and advisors, such as actuaries, modelers and investment banks,” said the agency in a report issued today.

The report noted that in some insurance securitizations not all risk is transferred from the ceding company. “In these transactions, it is critical to understand specifically what risks are being transferred and what types of agreements are in place to shield investors from risks associated with pandemics, catastrophes and terrorism,” the report stated.

Best said the following factors will be examined by analysts:

o How accurate is the data gathered and the likelihood of regulatory intervention for transactions that rely on credit risks of insurance-reinsurance companies?

o How have the various scenarios applied by the actuarial and catastrophe modeling agencies been determined and what are the results of the scenarios?

o Are policyholders subject to the risk of anti-selection if the better risks are transferred to investors?

o What risks can be put back to the originating insurance companies under scenarios of extreme adverse developments in mortality, lapse rates, interest rates, expense ratios, loss ratios and interest rates.

o For transactions based on parametric triggers such as catastrophe bonds, how is the probability of an event occurring tied to the probability of a trigger being activated?