A report from the International Monetary Fund has urged US and European regulators to address liquidity risks they see for life insurers because of their ties to private capital groups and their residency in Bermuda.

The IMF warned of the potential for contagion to the wider financial sector and ultimately the economy.

It names Bermuda in stating that offshore insurers established by private equity firms take advantage of regulatory arbitrage at the cost of reduced transparency compared with their onshore counterparts.

It claims onshore regulators are worried about increased risk because private equity firms use their offshore holding companies to reinsure their own onshore insurers.

The report said: “This arrangement allows private equity firms to issue insurance products, reinsure them and manage the premiums while limiting the ability of regulators to monitor them.”

Because of private-equity involvement, they say, Bermuda-domiciled life reinsurance assets by 2021 had exceeded $1 trillion, about 4 per cent of total life insurance assets globally.

One concern is for the increase in illiquid assets held by such companies in what the Financial Times called “less tightly regulated jurisdictions such as Bermuda”.

The Bermuda International Long Term Insurers and Reinsurers responded to inquiries from The Royal Gazette by emphasising the important role Bermuda plays in the global marketplace.

The organisation highlighted the co-operation that already exists among international regulators, including the Bermuda Monetary Authority.

A Biltir spokesman said: “Cross-border transactions, where ~75 per cent of the assets stay in the jurisdiction where the business is coming from, are reviewed by both the ‘home’ regulator and the BMA, which participates in bilateral discussions with other regulators including as a member of supervisory colleges as part of group supervision. This ensures a high level of transparency across all relevant regulators.”

Biltir added: “Bermuda provides a critical source of capital to strengthen onshore insurers so they can provide pensions and life insurance to new customers and maximise the protection to current customers.”

The IMF said the US National Association of Insurance Commissioners themselves have expressed concerns about lack of transparency and additional risks inherent in the relationships between insurance firms and private equity firms.

They see issues with obtaining quality data. They want a globally consistent consolidated capital standard for the insurance sector.

“Valuation of uncertainty and liquidity risk requires improving supervisory monitoring, intrusive supervisory review of insurers’ valuation processes and liquidity stress testing.

The IMF said: “Supervisors should work closely with other authorities in charge of systemic risk to analyse the possible contagion to other parts of the financial system and the real economy.”

However, the Bermuda Monetary Authority, using a risk-based solvency regime, has been aligned with the best international regulatory standards.

The BMA is considered fully Solvency II Equivalent by the European Commission and deemed a Reciprocal and Qualified Jurisdiction by the NAIC.

Additionally, it is subject to periodic monitoring exercises by the European Insurance and Occupational Pensions and the NAIC.

The regime is also compliant with the Insurance Core Principles of the International Association of Insurance Supervisors.

The BMA added in a statement that it requires prior approval of all life and annuity block reinsurance transactions and, in this process, includes a comprehensive set of information.

The statement added: “This information facilitates the processing of the applications and discussions with the cedent regulator. This process allows both the BMA and the cedent’s regulator to evaluate the transaction.

“The BMA would not approve a transaction that is not supported by the cedent’s regulator.

“In this regard, the authority upholds strong cross-border collaboration and transparent exchange of information through transaction-specific regulator-to-regulator discussions, ongoing exchange of information through written supervisor-to-supervisor inquiries and supervisory colleges where group-wide joint risk assessments are performed, and action plans formulated.

“The BMA is a signatory of the Multilateral Memorandum of Understanding of the IAIS and has a large number of signed bilateral MoUs with other peer regulators as per the BMA International Co-operation Policy.”

Published officially in October, The Global Financial Stability Report is subtitled “Financial and Climate Policies for a High-Interest-Rate Era”.

It follows a similar study in April designed to assess key vulnerabilities to which the global financial system is exposed and help to prevent crises by highlighting policies that may mitigate systemic risks. That contributes to global financial stability, the report said, and the sustained economic growth of the IMF’s member countries.

The IMF has maintained since the April report that financial stability risks are elevated.

The report shows the more than 400 per cent increase in Bermuda Reinsurance Long-Term Assets in the ten years to 2021, as the assets of private-equity-influenced insurers have also grown significantly.

The report says that private equity firms have increased their footprint in the life insurance sector, which they increasingly see as important to their strategic growth.

It adds: “Insurance companies can provide private equity firms with a stable supply of premiums that can be invested in private credit, structured credit, real estate and infrastructure funds arranged and controlled by the private equity firms themselves.”

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Global Financial Stability Report - Oct 2023.pdf