In this paper, Milliman’s Kevin Manning and Eamonn Phelan and Secquaero’s Scott Mitchell explore the reemergence of insurance-linked securities (ILS) in the life industry. They also discuss how ILS can benefit life insurers and reinsurers in the context of the evolving regulatory and accounting environment as well as the increasing focus on proactive management of risks, capital, and liquidity.
The need to enhance capital, liquidity, and risk conditions will be important for insurers under Solvency II. Value in force (VIF) monetization transactions can help them attain these business goals. In their article “Catching early cashflows,” Milliman consultants Chris Lewis and Scott Mitchell as well as Craig Gillespie, of Swiss Re, highlight some key aspects that insurers must evaluate before engaging in a VIF monetization transaction.
Here is an excerpt:
An insurer interested in exploring VIF monetisation must, as a first step, carefully consider the portfolios of business that it has available as the basis for a transaction.
A primary requirement is that there is a sufficiently large amount of VIF in the portfolio to make the transaction worthwhile for all counterparties. Secondary considerations focus upon the risks underlying the portfolio. Portfolios are likely to contain a mix of product types, each with their own combinations of demographic, behavioural and market risks.
The extent to which these risks can be transferred as part of a VIF monetisation will depend mainly upon a provider’s risk appetite. Generally there has been robust provider interest in the area from reinsurers, investment banks and private equity houses. Each provider will have specific expertise in assessing some or all of the risks underlying portfolios considered for VIF monetisation.
The provider’s risk appetite will to some extent determine both feasibility and appeal of the transaction terms to the insurer. It may be the case that in order to secure the most attractive terms the transaction may be structured with multiple counterparties, each assuming the run-off of different risks.
Solvency II will change the way insurance and reinsurance undertakings determine their capital requirements as well as introducing new rules with regard to what forms of capital can be used to meet those requirements.
This paper by Eamonn Phelan, Scott Mitchell, and Sinead Clarke addresses some of the key issues, including the need for a robust decision-making framework, how investment strategy fits in, uses of reinsurance, and the new regulatory landscape. The paper also outlines Pillar 2 and Pillar 3 requirements.