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Capital Markets

Insurance securitization: Finding a way to cope with mortality

AXA’s proposed extreme mortality cat bond will set the tone for the insurance securitization sector this year.

Having applied securitization to its vehicle insurance book last year via the innovative FCC Sparc deal, AXA now plans to offload mortality risk to the capital markets via a synthetic securitization to be arranged by Ixis CIB, Lehman Brothers and Swiss Re Capital Markets. The two types of risk are very different: the FCC Sparc deal dealt with high-frequency, low-severity claims whereas the mortality deal looks to address lower-frequency, higher-severity cover.

Mortality risk has been securitized before, principally via Swiss Re’s Vita Capital deals. The drivers for an insurance company to offload mortality risk include regulatory considerations and diversification of funding sources, but the rising cost of reinsurance has also weighed in the technique’s favour. Traditionally, reinsurers have been willing to price whatever risks are offered to them but they may become increasingly unwilling to take on mortality and life insurance risks. “There is limited capacity for peak mortality reinsurance, and securitization offers an alternative,” says Jonathan Spry, associate director at Standard & Poor’s and head of the agency’s insurance team.

Hard to quantify

Mortality risk differs from other types of insurance risk in that it involves a single risk: death. Other insurance securitizations, such as the value-in-force (VIF) deals (for example, Box Hill Life Finance) involve multiple risks such as longevity, mortality and price, whereas with mortality there is really only one variable.

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