Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Life insurance markets continue to use alternative risk financing and ILS


The life insurance side of the alternative risk financing, transfer and insurance-linked securities market is alive and well with reasonable deal flow in 2012 and a positive outlook to 2013, according to a recent paper on the subject published by actuarial focused firm Milliman Inc. Milliman includes a number of different structures within the life insurance-linked securities (life ILS) market, including the securitized cat bond-like deals we most commonly discuss on Artemis.

Milliman’s report looks at the gamut of alternative financing and risk transfer tools available for offloading life insurance risks, including reserve financing transactions and embedded value (EV) transactions under Regulation XXX or AXXX, life insurance-linked securitizations for morbidity and mortality risks and the growing market in longevity risk transfer.

In 2012, Milliman estimates that at least $12 billion in life insurance reserve financing and embedded value (EV) transactions were completed. This despite ongoing conversations around the best way to achieve reserving at the National Association of Insurance Commissioners and the use of captives to finance these reserves.

Most of these reserve or EV transactions involved U.S. life insurers seeking reserving solutions who typically sell level premium term insurance subject to Regulation XXX or universal life products with secondary guarantees (UL-SG) subject to Actuarial Guideline 38 (AXXX or AG38). Milliman said the forms of financing used continued to evolve in 2012. Milliman believes that this market grew in 2012 and a greater volume of transactions was completed than in 2011, but noted that due to less transactions being disclosed publicly it is hard to confirm that.

On the securitized side of the life ILS market, where catastrophe bond type structures are typically favoured as a way to transfer various risks affecting life insurers such as morbidity and mortality risks, Milliman says that 2012 saw around $625m of deal volume come to market. This is greater than the $500m it estimated for 2011.

On the embedded value (EV) side, Milliman says that it is only aware of one embedded value life securitization which it says was a private deal. However deals like Berkshire Hathaways reinsurance of VidaCaixa’s life products act in a similar way without the securities, allowing the life insurance portfolios embedded value to be monetised, and two such transactions were seen in 2012.

Milliman highlight the Vitality Re health insurance linked ILS deals as examples of securitized risk transfer which provides catastrophic morbidity protection. The lower pricing achieved on the latest Vitality Re IV deal shows that pricing for these transactions is coming into line with mortality transactions and could lead in other sponsors seeking to emulate Aetna’s transactions.

On the mortality side, two transactions brought mortality catastrophe bonds to the market, both involving Swiss Re with the $275m Vita Capital V Ltd. and its dual peril Mythen Re Ltd. (Series 2012-2) which combined both excess mortality risk with natural perils in a single tranche of notes for the first time.

The market for transferring longevity risks, not including insurer to reinsurer transactions, involved roughly the same number of deals in 2012 compared to 2011 but the volume of these deals was much higher thanks to a couple of exceptionally large transactions. Milliman cites the $7.5 billion Verizon deal, the €12 billion Aegon longevity swap and the $26 billion GM deal as examples which helped 2012 become a bumper year.

The paper from Milliman goes into some detail on regulatory issues affecting the life ILS markets and how these could impact it over the coming year.

Milliman expects the reserve financing market will continue to drive the life ILS market forwards as XXX and AXXX reserves grow by around $10 billion to $15 billion per year. What structure these reserve financing transactions will take depends on a number of factors that the paper explains.

On embedded value financing, Milliman said they expect to see a couple of EV ILS transactions in 2013, but a greater number of value-in-force type monetisation deals are likely which could be more akin to a reinsurance transaction rather than ILS.

In the securitized ILS, or cat bond-esque, side of the life market, Milliman suggests that the lower cost of risk transfer seen in the most recent Vitality Re deal could encourage new sponsors to the morbidity and mortality market and it hopes to see more transactions completed in 2013 than in 2012.

Finally on longevity risk transfer Milliman expects this market will continue to grow with more interest being seen in the U.S.

You can access the full report from Milliman via its website here.

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