Europe

Pledging future income

Value of In-Force (VIF) securitisation (when life insurers raise capital on the investment markets by pledging the future income of business currently on their books), will become progressively more popular in Europe, according to rating agency Fitch. While Fitch warns that this method of financing for life insurers faces a series of regulatory obstacles which may limit its future progress, the rating agency also notes that this kind of funding compares favourably with alternative sources of financing such as subordinated debt, equity or financial reinsurance. “Life companies are increasingly looking at VIF securitisation as part of their overall capital management,” Franz Lathullerie, an analyst at Fitch's insurance group and co-author of the report, said. Fitch identifies three main hurdles for VIF securitisations. First, changes in the regulatory or accounting framework could make these transactions less efficient; second, the regulatory and economic value obtained from securitisation should be weighed against the high structuring and legal fees of these complex transactions as well as the premium required by investors to take on insurance risks. Finally, the recent flurry of regulatory investigations and censure in the US with regard to the use of financial engineering in the non-life insurance and reinsurance markets may make life insurers more cautious in being seen to indulge in similar practices.