S&P Comments on Excess of Loss Medical Claim Securitization Transactions

October 18 00:00 2011

NEW YORK, October 18 (RainbowNewsLine.com) – In Standard & Poor’s Ratings Services’ analysis of special-purpose entities (SPE) that securitize medical benefit claims there are factors that we consider in the analysis of the ceding health insurer.

Vitality Re Ltd. and Vitality Re II Ltd. are two SPE’s that securitizes medical claims.  These SPE’s take charge of payments if the medical benefit ratio, which calculates the medical claim cost paid by the insurer as a percentage of premium revenues if exceeds a pre-defined level. In S&P’s analysis for the surrendering insurer, they deduct statutory capital in the SPE from total adjusted capital. Moreover, they evaluate pricing risk and business risk; they assess capital charges on net basis and debt related as operating leverage.

In this approach, note holders have no alternative to the direct writer or to the holding parent company, essentially making the reinsurance part of the deal alike with to a transaction with a fully independent reinsurer. This is the reason why a transactions is treated as operating leverage and not as financial leverage while calculating holding company ratios. Therefore, capital of reinsurer is excluded in S&P’s capital model, but to reflect the risk transfer to the reinsurer they deduct already paid premiums from pricing and business risk charges. And similar model is used for structured financed transactions related to life insurance reserve funding & property/casualty which are treated as collateralized reinsurance arrangements.