What is life insurance securitization or life ILS?

Life insurance securitization is becoming an increasingly common aspect of insurance-linked securities. It acts as a further source for investors to diversify their portfolios and is an additional way to utilize risk exposure and transfer this to the capital markets.

Typically used in a similar way as other forms of ILS, like longevity, mortality and catastrophe bonds, life ILS is often used as a means to raise risk capital, and in principle they all hold the potential to achieve the same objectives. That being said, the majority of life securitizations to date have been for financing transactions rather than a primary focus on spreading risk.

One of the ways a life insurer could benefit from securitization is when they have a potential for vast growth, as securitization can provide a greater leverage capacity than traditional financing techniques – like issuing equity capital. Life securitization also utilizes credit wraps backed by third-party guarantors, which in return is creating confidence in the market by helping to minimize investor risk.

Life ILS is expected to grow over the coming years as more and more life insurers continue to seek ways to raise capital and protect themselves against losses. It gives investors a chance to access the returns of life insurance business, as well as giving them the chance to diversify or hedge within their portfolios of assets.

Securitization also provides the scope to deal with the long payback periods of life insurance products, something that has always troubled investors within the life industry.

Value of in force life securitization

Value of in Force or VIF securitization is a financial tool that enables an insurer to monetize the potential profits of an insurance portfolio.

VIF has the tendency to be unpredictable and investors are often exposed to the problem that the cash flow created can be insufficient to cover principal payments and accumulated debt interests.

Insurers can benefit via VIF as it enables multiple tranches with various levels of risk-return and trade-offs available for placing.

Keep up with the latest life insurance securitization news on our blog.

Jardine Lloyd Thompson Capital Markets