The reason for this is not too difficult to find. For life insurers, it is their capital level that determines the kind of products they sell, their operational scale and other plans (like acquisition and expansion). This is apart from meeting the solvency norms.

But there is a snag here. With Indian promoters (or promoting companies) holding a 74-per cent stake (or slightly less) in their life insurance ventures, and a new venture needing at least six years to break even, will the shareholders keep on pumping additional money without any return on capital?

A question to ponder. Given this situation life insurers need to look for other means of financing. Can securitisation of the life insurance premium or other receivables be one such financial tool?

For the uninitiated, securitisation or monetisation is simply palming off a block of future receivables to investors as a tradable instrument for a sum to be received upfront. In India, securitisation of receivables is developing fast with finance companies auto and housing loan companies resorting to this method.

"Securitisation in the life insurance industry? Are you out of your mind." This was the immediate industry reaction not just from India, but also from countries like the US and the UK when this question was posed.

American Council of Life Insurers director (media relations and external communications) Herb Perone says: "Currently, there is no life securitisation in the US. We are exploring the issue with a number of our member companies and the National Association of Insurance Commissioners. Tax law changes, and the establishment of regulatory oversight of transactions will be necessary to make life securitisation economically viable in the US."

Concurs AMP Sanmar Life Assurance chief actuary Mike Wood, an Australian: "Securitisation of life premiums is not something I have come across in practice."

While securitisation has evolved well in the global debt market and in the non-life sector (through catastrophe and cat bonds) it is yet to make its presence felt in the life insurance sector. Very few securitisation deals have been struck in the life insurance world though life insurance contracts are long term in nature.

Says Birla Sun Life Insurance associate director (alternate channels) P Nandagopal: "Securitisation works better where the remittances expected constitute a debt receivable. In the case of life premia, its not a debt receivable but only payable at the option of the insured."

"Other than the loss of entitlement to the promised benefits there is no other sanction for non-payment of premiums," says HDFC Standard Life Insurance appointed actuary Nick Taket. Thus, for life insurance contracts, the income stream from premiums is subject to a degree of uncertainty general economic conditions and individual behaviour of millions of policyholders and is difficult to assess.

"Given this level of risk, I cannot see the capital markets willing to take on such a high degree of risk," says Taket.

Nevertheless, monetisation in life insurance does exist in an alternate form. Standard and Poors director (insurance ratings) Earl Lancaster suggests the alternative. "It is more likely that insurers and investors would prefer to securitise expected future emerging profit streams rather than premiums." Concurring with him are his colleague Paul Waterhouse (director [Insurance Ratings]) and Swiss Re life and health actuary (India) David Muiry.

"The future profits and surplus (rather than premiums) attaching to any time of contract can be contemplated for securitisation, though the key risks may differ by the contract type," says Lancaster. Apart from the future profits, life insurers can monetise their policy loans, real estate and mortgages.

The two cited securitisation deals are the 260-million embedded value securitisation for NPI, UK, in 1998 and the euro 275-million policy loan securitisation for Alleanza Assicurazioni, Italy, in 1999.

Theoretically all the existing policies can be securitised, but at present it is done only in blocks. Monetisation of future profits and embedded values in a block of policies is similar to a loan securitisation, where investors acquire the embedded value (the present value of future profit or surplus in a block) for a discount.

For the investor risks depend on the kind of life insurance contracts he has chosen. "Life and annuity risks are based on mortality, they can provide a relatively predictable trigger in securitisation," says Dabur CGU Life director (marketing and distribution strategy) Shah Rouf.

In the case of endowment policies, Lancaster says, investment returns, followed by persistency (the risk of fewer renewal than anticipated), will be the key issue. "For term assurances, mortality, followed by expenses and persistency, will be important; and for annuities, longevity and investment return are the crucial factors."

Apart from releasing the reserves that could be profitably deployed, the benefits of securitisation depend on the very purpose of the transaction and its impact on the insurers finances. "If the insurer requires the capital either to support expansion or to acquire another company, and securitisation permits the capital to be raised in a cost-effective manner, then it is beneficial for the capital," says Lancaster.

The key issues that are to be considered before concluding a transaction are: the predictability of future profit streams; expected future profit streams and its variability; the risk elements affecting future profit emergence; investment returns; asset allocation; persistency; the bonus allocation policy; expenses; inflation; the nature of the underlying policies, including options and guarantees; mortality; morbidity; longevity; the potential impact of the non-securitised business on the securitised business; and the resilience of the structure itself.

In addition, what should be kept in mind is the regulators reaction to the deal. Lancaster advises life insurers to take the regulator into confidence before any monetisation deal, as he has to be satisfied about the safety of the policyholders money and the accounting aspect of the deal.

Unlike other industries, where the securitised debt portfolio goes off the companys balance sheet, the accounting treatment of securitised policy blocks depends on local accounting and reserving regulations, the local actuarial practice and the guidance and the nature of the transaction itself.

At times the regulator may not allow the life insurer to take away the securitised block of policies from its books. In that case the insurer have to reserve for that block of policies as if it was not monetised, resulting in further strain on the finances.

On their part rating agencies like Standard and Poors (S&P) will examine

1. the motivation for the securitisation and the rationale for using the tool rather than other means
2. the structure of the transaction
3. the impact of such a deal on the true inherent financial profile of the insurer and in particular: (i) the extent of economic risk transfer if any; the impact on (ii) risk-based capitalisation; (iii) financial flexibility; (iv) prospective operating performance; (v) investment strategy; (vi) business position prospects; (vii) liquidity
4. how the insurer intends to utilise the proceeds.

The combination of all these factors will determine whether the particular transaction is positive or negative for the financial strength of the insurer.

Speaking about the modality of structuring a securitisation deal, Swiss Res Muiry says an insurer should earmark a set of policies and pass that off to a special purpose vehicle (SPV). The SPV will raise funds from the capital market and give the sum to the life insurer as a loan. The repayment of the loan is on the payment of the premium on the said block of policies and it is contingent on the emergence of future profit.

But what happens to the investors and bondholders if the life insurer fails? It depends on how subordinate or otherwise the transaction was relative to other liabilities of the insurer. "It is unlikely that it could rank parri-passu, or superior, to the policyholders obligations. But it is possible that third parties support a transaction such that the insolvency risk is transferred from investors to that third party," says Lancaster.

Lancaster believes that the persistency risk (the risk of a policyholder surrendering the policy early) will typically be passed on to the investors. "But this will be factored into while determining the transaction proceeds and in stress-testing the expected emergent future cash flows. It may be possible to transfer the persistency risk to a third party or to limit the downside of that through other transactions that would benefit the investors."

To reduce the volatility in emergence of surplus and to attract the bond investors reinsurance could be built into securitisation deals. "But S&P will expect the reinsurer(s) to submit to a Financial Enhancement Rating, which assesses the willingness for the (re)insurer to  pay in full on a timely basis," says Lancaster.

Given the very low number of deals made by the global life insurers, Rouf feels securitisation in life insurance will remain a very specialised field a niche market.  "I do not think the demutualisation of some big US- and UK-based life insurers is necessarily going to change that."

"Securitisation is not a simple process; it will take a couple of months to seal a deal," adds Muiry. He says the Life Insurance Corporation of India is the only company that is capable of monetising its policies here. The reason? Its size and the number of policies it has on its portfolio.

"Structuring a securitisation deal is no easy task the new private insurers in India have a long way to go," says Watson Wyatt managing director Richard Holloway. And for them equity is going to be a major funding source.