There are two interesting regulatory developments of interest to the insurance-linked securities space. First, the Securities and Exchange Commission is considering a proposed rule which would change the regulation of money market mutual funds under the Investment Company Act of 1940. One alternative being considered is to require funds to sell and redeem shares based on the current market-based value of the securities, i.e., that they transact at a “floating” net asset value per share. If funds in cat bond reinsurance trusts or more traditional collateralized reinsurance trusts were invested in such floating value instruments, the value of the collateral might decline and adversesly affect the amount of reinsurance or the amount of collateral available to a ceding insurer. However, the proposed rule exempts from the floating NAV requirement funds which are 80% or more invested in cash, government securities or fully collateralized repurchase agreements. The investment guidelines of most new cat bonds and collateral agreements would come within this exception, and the conservative investment of trust assets should avoid the potential adverse impact of the floating NAV requirement in the current proposed rule.
Second, the European Union’s Joint Forum, which is composed of the EU’s banking, insurance and securities regulators, has issued a report titled Longevity risk transfer markets: market structure, growth drivers and impediments, and potential risks (August 2013). This report describes the three types of transactions that are being used to transfer longevity risk: buy-out transactions; buy-in transactions; and longevity swaps or insurance. Given that the total global amount of annuity and pension related longevity risk exposure ranges from $15-25 trillion, understanding these risks, the alternative risk transfer methods of dealing with them and the views of regulators concerning such issues is important for anyone interested in the potential development of the equivalent of a cat bond market for longevity risks.
This post written by Rollie Goss.
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