The Central Insurance company of Iran, the industry’s regulator, has welcomed the government's action plan to create the conditions for offering insurance risk securities, saying that it would turnaround the key sector.
"Insurance companies are cementing their ties with the stock market. If the new measure is approved by the parliament, insurance policies could be traded in the market," Gholamreza Soleimani was quoted as saying by Shada, the Economy Ministry's official news outlet.
Insurance securitization may be defined as the transfer of underwriting risks to the capital markets through the creation and issuance of financial securities. Rather than an insurer transferring its underwriting risk to a reinsurer within the insurance industry, the risk is transferred to the broader capital markets.
The CII has been called often to introduce insurance-linked securities (ILS) so that domestic insurers can offload some portfolio risk in the capital markets. This move has been included in the 2022-23 budget bill submitted to the Majlis by the government earlier this week.
ILS are typically tied to natural disasters such as earthquakes and offer high yields; investors can lose their principal if a catastrophe occurs. They can also serve as an alternative to reinsurance cover.
In principle, the securitization of insurance risk is not limited to catastrophe risks. Nevertheless, insurance securitization has developed in response to a growing awareness that the capacity for natural calamities cover available on the insurance market hardly constitutes a fraction of the maximum exposure. To acquire additional capacity, primary insurers and reinsurers have begun to securitize disaster risk portfolios.
Back in 2018, the CII said issuing insurance-linked securities were approved by the Securities and Exchange Organization and its Islamic Jurisprudence Committee. The bonds were expected to be issued before March 2019.
“Insurance companies were allowed recently to buy government bonds," the CII boss said. Insurance companies have bought 7.3 trillion rials in bonds so far.
These companies used a part of their bank deposits and excess liquidity to buy government debt and improve increase the profitability of their investments.
Soleimani noted that insurance companies are required to separate life insurance reserves from other categories, "These reserves must go into long-term investment.”
The measure is mainly to discourage insures from using life insurance resources to cover losses in other categories. It can also help enhance the efficiency of their investments and prevent possible future losses.
According to CII data, insurance companies sold nearly 18 million life insurance policies in the four months of the current fiscal year that started in March, up 17.79% y/y.
Life insurance accounted for 15.8% in the four-month portfolio. Insurance companies generated 50.2 trillion rials ($184 million) in life insurance premium, the CII said.
