Securitisation - A Way of Life?

Author:Ms Pollyanna Deane
Profession:Barlow Lyde & Gilbert

Times are hard for longterm insurers. Battered by Stock Market falls, adverse publicity from industry crises such as mis-selling and the woes of Equitable Life and with the regulators' increased attention on the with profits policy (one of the mainstays of the industry), many conclude that the days of the life insurer are numbered. Even the Financial Times (26 July 2002) has referred to the "prevailing atmosphere of fear" in the life sector.


For both insurers and the FSA, the need to keep the business running within the solvency requirements is paramount. The World Trade Center attack and heavy falls in stock markets worldwide have already led to the relaxation of UK solvency requirements on at least two occasions in the last 12 months (the first on September 11 2001 and the second at the end of June 2002). Although such relaxation has helped, questions are being asked as to the value an insurer can put on intangible assets and the status of inadmissible assets. Ultimately will such reactive measures from the regulator prove enough to support the industry in its current state?

Already, the sector is considering another round of mergers, although currently there is understandable hesitation over undertaking these costly exercises. Nevertheless the FSA will be keen to see weak companies bolstered by the strength of stronger firms. They are also under pressure to implement the new legislation emanating from the EU and the results of the Basel Capital Adequacy Review.

The issue of financial strength has led to some activity in the ART sector and the possibility of accessing the capital markets can rarely have seemed so attractive. Although some saw the industry's tribulations as the springboard for an explosion of ART, this has yet to materialise and much depends on the attitude of the regulators who earlier this year referred to some of the financial reinsurance written within the industry as being "toxic". The FSA has recently published a Consultation Paper on financial engineering (CP 144). The main aims of the review are to provide (1) for closer control and analysis of the inherent risks in the arrangements; and (2) the market with clearer presentation of the effects of financial engineering on life companies. Emotive headlines reflect the increased scrutiny the regulators are imposing on this area, nevertheless, with the shrinkage of capacity in the reinsurance market, securitisation is likely to become...

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