US concern over growing offshore life reinsurance
Bermuda’s burgeoning life reinsurance business is now seen as part of a developing offshore problem for the industry.
Moody’s Ratings says in a new report that offshore life reinsurance activity will continue to grow in 2025, raising counterparty risks and lowering transparency — a credit-negative development for the sector.
US regulators have grown concerned about the increase in business ceded offshore.
The National Association of Insurance Commissioners Life and Annuity Task Force has proposed asset adequacy testing for US life insurers to evaluate ceded reinsurance.
It wants a better understanding of the assets, reserves and capital-supporting asset-intensive reinsurance transactions.
The task force is proposing that the reinsurance AAT guidelines be narrow in scope, significant and focused on asset-intensive reinsurance transactions.
Moody’s said: “The growing influence of private capital in life insurance is reshaping the sector’s landscape by expanding balance sheets and assets under management, supporting mergers and acquisitions, and ultimately driving reinsurance from the US to Bermuda and Cayman Islands.”
The report said: “US life insurance and annuity reserves ceded offshore since 2017 has surged to almost $0.8 trillion, over 40 per cent of the $2.3 trillion of total reserves ceded, mostly to Bermuda [81 per cent].”
The rest of that $800 billion?
About 9 per cent went to Cayman, 4 per cent to Barbados, 3 per cent to Switzerland, 2 per cent to Ireland and all others represented 1 per cent.
The report explains: “Counterparty exposure is one of the most significant risks for insurers ceding business offshore, and as reinsurance activity has grown, the risks have increased.
“Shifting reinsurance offshore lets insurers exchange the risk related to direct investments, which support their liabilities, for the risk related to the reinsurers' performance in the transaction.
“US state regulators, concerned with the rise in business ceded offshore, are evaluating risks on asset-intensive reinsurance — a credit positive.”
But as private capital’s consolidation of life and annuities liabilities has expanded, these organisations have also moved into new business sales, largely in annuities, while seeking fresh capital.
Insurers are drawn to sidecars as a way to grow their business, while investors seek attractive opportunities to deploy capital.
Moody’s said: “The current US economic outlook and the stable outlook on the US life insurance sector continues to support the demand for life and annuity products.
New and existing strategic partnerships between private capital — including alternative asset managers — and life insurers have also grown substantially.
Business strategies that combine the interests and expertise of life insurers and alternative asset managers are expanding the balance sheets of life insurance companies and increasing assets under management, supporting mergers and acquisitions and divestiture activity.
These factors will continue to drive growth in reinsurance activity and the shift to reinsuring US life insurance business offshore, mostly from the US to Bermuda, through 2025.
• For more on Moody’s Ratings in-depth report on Life Insurance — US and Bermuda, entitled Offshore reinsurance goes mainstream, raising counterparty risk, see Related Media
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