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The increasing pressure on life insurers to diversify their portfolio risk, coupled with their efforts to improve earnings, is heightening interest in the securitization of insurance policies as an alternative to boost liquidity, said analysts with Standard & Poor's, New York, in a teleconference.
The securitization of life insurance policies is a transaction that is similar to a loan. The investor gives the insurer a lump sum and receives, in return, future earnings on a specific block of insurance business in the same way a lender receives payments on a loan, while accepting the associated payout risks. Meanwhile, the life insurer is free to use the cash it has raised in the transaction.
"In the past, insurers have both created insurance products and kept them on their balance sheets, rather like being a manufacturer and a warehouser of the same product," said Jayan Dhru, director with S&P. By freeing up capital and liquidity, securitization will make much-needed resources available for life insurers and allow them to concentrate on what they know best. "Securitization allows life insurers to concentrate their key talent of underwriting by realizing income flows more quickly," he noted.
Despite the benefits securitizations will bring to them, life insurers, in the past, had little mechanism or incentive to securitize insurance policies. However, with demutualization in full swing in the industry, a new market for securitization is surfacing, according to Dhru.
After demutualization, life insurers will have to act more like fund managers for their policyholders and shareholders than security guards for the vault of policyholder's money. "[Demutualized] life insurance companies now have to consider shareholders and their demand for competitive returns on equity," he noted. "Once risk has been transferred through securitization, insurers can earn higher returns without impairing their ratings."