Hi
Ref 2, one way to think about it is consider the following equation of value:
ERM receivable = senior note + junior note
The senior note is constrained by the MA eligibility criteria. So the structurer will need to set such parameters as the (fixed) tenor, coupon rate etc. In practice the tenor may be set by considering the expected life expectancy of the customer and the coupon may be set by considering the desired credit rating etc.
The junior note can be thought of as the balancing item to get you back to the value of the ERM receivable. This note will be exposed to such risks as morbidity and prepayment risks, ie the risks that make ERMs in unrestructured form MA ineligible. This is where the risks you highlight will likely sit; ie the crystallisation of these risks will burn through the value of the junior note first. The risk to the senior note will manifest via the fundamental spread.
This is a complex area but I hope the above is useful.
A final point on surrenders:
An insurance contract that allows surrenders does not automatically make it MA ineligible. Broadly speaking, surrenders are allowed provided its ‘cost neutral’. The precise wording can be found in the Directive.
Similarly, assets that contain the option for the issuer to redeem an asset does not automatically make it MA ineligible. Again, the precise wording can be found in the Directive.
Last edited: Jan 14, 2019