• Reduce interest-rate risk. Securitisation allows companies to match long- The challenge for small and mid-sized companies is to accumulate a suf-
duration liabilities with duration-matched assets, reducing the firms’ ex- ficiently large, homogeneous block of business that can be analysed and se-
posure to changes in interest rates. curitised efficiently. In addition to having sufficient business to contribute
to a securitisation, the sponsor needs to be prepared to make a significant
• Competitive advantage. The securitisation of life insurance assets and
investment in actuarial modelling capabilities, corporate finance expertise
liabilities has been used by several insurers to increase their capacity for
and administration capabilities. For the small or mid-sized company, a more
growth, or to crystallise tax and other benefits that can be used to im-
efficient means of accessing the securitisation marketplace and reaping its
prove product pricing.
benefits might come from having a relationship with a reinsurer willing
• Improve capital adequacy and solvency. Life securitisation can enable
to aggregate risk from several ceding companies and to contribute it to an
the monetisation of an insurer’s embedded value and improve the capital
efficient securitisation process.
adequacy and solvency position of an insurer.
While securitisation has been slow to catch on in the life insurance
The benefits of securitisation are many, but all share the common feature
industry as compared to other financial institutions, the recent increase in
of decreasing the risk-adjusted cost of capital of the sponsor and, thereby,
the number of transactions suggests that the technique is beginning to gain
increasing the sponsor’s return on equity.
acceptance among an expanding constituency. Ultimately, broad accep-
Securitisation is also prompting changes to the business model of life
tance of this corporate financing tool will be driven not by fashion, but by
insurers to one characterised by capital and risk management expertise.
economics. As insurers recognise and embrace the ability to optimise their
The traditional ‘buy and hold’ approach is evolving with securitisation to
balance sheets and reduce their risk-adjusted cost of capital through inno-
include a balance sheet ‘acceleration’ component. The new model calls for
vative securitisation structures, activity in this asset class will accelerate.
companies to source and aggregate risk on the front end, and to intermedi-
Over time, widespread use of securitisation to repackage traditional life
ate risk to the capital markets.
insurance risks into something that can be absorbed by the capital markets
To date, the vast majority of life insurance securitisation transactions has
will have a transformational effect on the life insurance industry and how
been successfully completed by large organisations. Yet, several small and
it sources, retains and funds risk
mid-sized companies have demonstrated that a focused effort can drive a
successful securitisation effort and deliver significant benefits. In fact, small
and mid-sized life insurers stand to benefit the most from a successful secu-
ritisation programme by closing the cost of capital gap and providing access Scott Willkomm is president and chief executive officer of Scottish Re
to significantly more capacity to support growth. Group Limited. Its website address is www.scottishre.com.
BermudaReinsurance . June 2006 29
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