Journal of Taxation and Regulation of Financial Institutions
“Insurance Securitizations: Coping With Excess Reserve Requirements Under Insurance Regulations”
The use of insurance securitizations – a broadly defined class of transactions involving insurance companies that have emerged during the past decade – has increased substantially since February 2001, when Regulation XXX became effective on a rolling basis in 37 States. Regulation XXX imposes conservative assumptions and valuation methodologies for determining the level of statutory reserves, which insurers are required to hold under statutory accounting principles for term life insurance policies with long-term guarantees of premium rates. These conservative assumptions result in significantly higher reserve levels for term life insurance business than were previously maintained and limit the financial flexibility of direct issuers of term life insurance and reinsurers of such business.
More recently, the National Association of Insurance Commissioners promulgated Guideline AXXX, an actuarial standard analogous to Regulation XXX that requires higher reserves for secondary guarantees on whole life insurance policies. Since the inception of Regulation XXX, more than $20 billion face amount of securities have been issued to fund Regulation XXX reserves, and industry professionals estimate that within the next ten years, additional reserves required by Regulation XXX and Guideline AXXX will exceed $150 billion.
This article examines the impact of Regulation XXX on the reinsurance market, typical structures in Regulation XXX reserve funding securitizations, and some of the key issues arising with respect to such insurance securitizations.