An Underexploited Opportunity: Insurance-linked Funding in the Life Space

Abstract

Life insurance companies have traditionally met funding needs through the issuance of corporate debt and equity. Life-linked financings, which do not have financial recourse back to the insurer, provide insurers with a relatively new, alternative source of funding away from the more traditional forms of corporate finance. At the same time, they provide investors with predictable cash flows that are based solely on underlying insurance risk drivers and are not correlated to alternative investment opportunities. The three ways that the capital markets can be used for financing insurance company needs are to create capital efficiency, to drive earnings growth and return on equity, and to transfer risk. This article starts by explaining the financial underpinnings of a life insurance company’s business model. It reviews the categories of life-linked financing, then provides a credit framework outlining the key life product risk drivers, and finally explains the benefits and opportunities of life-linked investments for both issuers and investors, now and in the future.

TOPICS: Fixed income and structured finance, exchanges/markets/clearinghouses