The U.S. life insurance securitization market has grown in recent years, driven by a combination of higher reserving requirements and growing expense and capacity issues associated with more traditional reinsurance alternatives. Securitization gives life insurers access to capital markets trading for certain statutory reserves, thus freeing capital for other uses. This flexibility to adapt to various product reserving and regulatory requirements continues to garner interest among life insurers and market participants alike.
Regulation XXX 'Excess' Reserves
The National Association of Insurance Commissioners' Valuation of Life Insurance Policies Regulation of 2000--or Regulation XXX--sets statutory reserve requirements for level term insurance business. Similarly, Actuarial Guideline 38 sets forth reserving requirements for universal life insurance policies with secondary guarantees. The required term insurance reserves, called XXX reserves, and universal life insurance reserves, called AXXX reserves, are widely believed to exceed the economic reserves actually needed to fund future policy obligations.
Historically, these "excess" reserves were reinsured on a coinsurance basis in traditiorlal life reinsurance markets, usually via cessions to offshore reinsurers collateralized by letters of credit. This effectively released the capital held as excess reserves--the ceding insurer took a reinsurance reserve credit in its statutory financial statements.
However, U.S. bank consolidation …
