Introduction to Securitization

SECURITIZATION OF INSURANCE PROFITS

We conclude this chapter with a discussion of an interesting development in the securitization arena: securitization of the embedded value of insurance contracts. While risk securitization has been around for a while and securitization of future annuities or endowment contributions is also near routine, a new asset class of the securitization market has recently been introduced: securitization of value of in-force life insurance policies, or the embedded value of life insurance.

Unlike other alternative risk transfer devices, this securitization is not essentially a risk transfer device; it is predominantly a device to monetize the profits inherent in already contracted life insurance policies. It is comparable to the securitization of the servicing fees of a servicer, the residual profits of a business, or the fees of asset managers.

In life insurance business, the key cash flows of the insurer consist of:

• Inflows

• Premiums

• Annuities

• Investment income and capital receipts

• Fee income (for specific insurance contracts only)

• Outflows

• Policy benefits

• Annuity payments

• Investments

• Surrenders

• Expenses, both origination and continuing

• Capital expenditure and investments

• Taxes

 

The value of in-force life insurance policies tries to capitalize the net surplus out of these cash flows. Sometimes also known as block of business securitization (as the early usage of such funding was to refinance the initial expenses incurred ...