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The application of securitization techniques to the life insurance industry began modestly more than a decade ago in the shadows of an otherwise exploding mortgage and asset securitization market. The process of isolating pools of assets or cash flows and transforming them into securities with investment-grade ratings has been relatively slow to catch on in the life insurance industry, despite the industry's overwhelming size ($10 trillion of assets and liabilities). In the past five years, however, life insurance securitization has emerged as a significant development in the capital markets, with more than $10 billion of life securitizations coming to market in this period involving more than 15 different sponsoring life insurers and reinsurers. The economic and regulatory drivers of this development suggest that this segment of the securitization market is just beginning to grow.
This article will focus on three types of life insurance securitizations that have witnessed the most significant growth in recent years: 1) regulatory reserve securitizations, 2) block-of-business securitizations, and 3) mortality catastrophe bonds. This article will discuss the motivations behind these transactions for insurers and reinsurers and, in a general manner, the principal legal issues that arise in structuring and effecting them.
REGULATORY RESERVE SECURITIZATIONS
Background
Life insurance regulatory reserve securitizations have provided the most significant growth in the life insurance securitization market in the last three years with major offerings completed by the direct insurers Genworth Financial and Legal and General plc and by the life reinsurer Scottish Re. These transactions are commonly referred to as Regulation XXX securitizations.
Regulation XXX refers to NAIC Model Regulation 830, which was adopted by most U.S. states effective January 1, 2000, and today is applied in 40 states. Regulation XXX imposes new conservative methodologies and assumptions for the calculation of the required statutory reserves for life insurers that issue guaranteed-level-premium term life insurance policies. The result has been a substantial increase in the reserves required to be held by life insurers on their statutory accounting statements for these policies. These statutory reserves are significantly in excess of the "economic reserves" which are the reserves that actuaries and accountants would determine are necessary to cover the future contractual obligations under these term policies. Economic reserves more closely approximate reserves calculated under generally accepted...