Capital market approaches to funding AXXX Reserves

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By David Ingram , Eric Schwartz, Jacqueline M. Keating, Carl A. Friedrich, Dale J. Visser | 01 October 2004

There is significant interest among life insurers and reinsurers in financing a portion of statutory reserve requirements for level premium term business through the capital markets. Companies are exploring the potential to use similar structures to finance a portion of the statutory reserve requirements for universal life products with secondary guarantees. However, because of the complexities of the universal life products and the inherent risk factors, the transaction models developed for the level premium term business are not directly transferable to universal life.

In this report, we develop a methodology that may be used to assess the risks in a universal life product with secondary guarantees. The basic methodology provides a means to develop the amount of statutory reserves that might be financed through the capital markets and the amount that would be financed by the insurance company or reinsurer. This methodology relies on a stochastic analysis of the cost of the secondary guarantees and a comparison of the cost of the secondary guarantees with the additional statutory reserve requirement due to the secondary guarantees.

The results of our analysis are applicable only for the hypothetical product assumed in our modeling and are dependent on the chosen assumptions and interest rate generator. However, the methodology described in this report should extend beyond this particular example.