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Insurers have been undertaking feasibility studies on VIF transactions, say consultants, which is seen as a precursor to heightened activity. Three Spanish bancassurers have conducted VIF transactions during the past year to monetise the embedded value of defined blocks of life business to cover domestic regulatory requirements.
The treatment of VIF by the forthcoming Solvency II rules will have a major influence on deal activity, say experts. Under current draft rules, a version of VIF – expected profits in future premiums (EPIFP) – can be treated as a Tier I regulatory capital.
However, Solvency II's definition of contract boundaries, which places a time limit on the future premiums that can be taken into account, are narrow and could limit the capital benefit of the EPIFP. As a result, this may drive a wave of VIF monetisation activity once the directive comes into force, according to Garry Sharpe, senior consultant at Towers Watson in London.
Even if VIF is adequately recognised in insurers' Solvency II own funds, the unpredictability of the future cashflows may encourage firms looking to shore up their capital position to monetise it.
Dan Knipe, life portfolio manager at insurance-linked securities (ILS) investment specialist Leadenhall Capital Partners in London, says: "Even if you can take all of your VIF and there are no contract boundaries, you presumably do not want to include too much of your VIF in your regulatory capital because it is a volatile number".
Insurers can monetise VIF through financial reinsurance, or use the capital markets and securitisation techniques. Financial reinsurance transactions are currently popular, with the recent VIF monetisations in Spain using this technique.
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