Securitizations complement rather than compete with reinsurance: S&P

Insurance securitizations, once perceived as a competitive threat to reinsurers, have become a complementary product to traditional reinsurance coverage, notes a new report by Standard & Poor’s.
“Insurance securitizations have long been viewed as an alternative for of risk transfer to reinsurance, with insurers ceding their risks to the capital markets in order to improve financial flexibility, reduce concentration exposure, access cheaper financing, increase capacity and better match assets to liabilities,” write analysts Jose Siberon and Stephen Searby. However, reinsurers are increasingly using capital markets to reduce the cost of capital embedded in their products.
“Securitization deals are benefiting reinsurers by allowing them to concentrate on offering products with higher risk-adjusted returns in conjunction with well-understood and manageable risks,” says Siberon. “In addition, reinsurers are taking advantage of innovations in the capital markets to broaden their product offerings and create new products with lower financing costs.”
Despite this, the use of securitizations still pales compared to traditional reinsurance. S&P says it has rated insurance-related structured finance securities with a total issuance of US$12 billion since 1999. This compares with a global net written reinsurance premiums of US$163.5 million last year alone.
The reasons, says Siberon, have to do with structural challenges inherent in securitization deals. “Structured solutions can affect ceding companies’ financial leverage position, some insurance contracts are unfriendly to the capital market tradition of timely payment and could create risk to investors, legal risks associated with the convergence of the markets can be difficult to resolve, and the cost of transactions remains high relative to traditional reinsurance.”