An open letter from the American Securitization Forum (ASF) to the U.S. government agencies concerned with the regulation of financial markets and the creation of the Dodd-Frank reforms requests that any new credit risk retention regulations should take into account the needs of niche securitization sectors. One of those niche securitization sectors mentioned in the letter is those involving insurance-related assets.
We can only assume that they refer to the spectrum of insurance-linked securitization such as catastrophe bonds, life, longevity and mortality linked securities.
To give you a bit of background, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 Section 941, calls for the development of regulations which would require issuers of securities to keep an economic interest in the credit risk of an issuance. To date, this hasn’t impacted the insurance-linked securities market and the only changes have been in some of the ratings process of transactions.
We don’t believe that the call for insurance-related asset securitization to be taken into account will result in any major changes that could impact the ILS market, however it is encouraging to see them being included in the dialogue as that could help to prevent any regulation being put in place that adversely affected it.
The ASF highlight a number of different ‘esoteric’ asset classes that they say have their own distinct characteristics and nuances that need to be considered when any new rules regarding securitization are created. The list includes: equipment-related assets, such as tractors and other farm equipment, insurance-related assets, intellectual property, municipal bonds, mutual fund fees, church loans, mobile home parks, servicing advances, timber, pay day loans, tax liens, cell towers, time share receivables, transportation assets, aircraft leases, railcars, and shipping containers and vessels. So as you can see applying a broad-brush type regulation could be harmful, and it’s good that this issue has been raised.
The letter also asks the agencies to clarify the rules with regards to collateralized security issuance through use of SPV’s where the transaction is secured through the use of financial assets and present a different set of risks to asset backed securities.
Now a conversation has been started about how Dodd-Frank could impact aspects of securitization which could include ILS it would be prudent for those involved in the market to read the letter and even reply or send their comments to the agencies concerned if you have any fears about how these regulations could impact cat bonds and ILS.