According to an ALIRT Insurance Research report, there are both benefits and risks to US Life insurers’ growing dependence on Bermuda reinsurance, adding the nexus is likely poised to grow.
The use of Bermuda reinsurance has grown significantly over the last five years, says ALIRT, becoming a core strategy for many insurers to support their new business writings, particularly concerning individual annuities.
The report adds that the amount of US life and annuity reserves ceded to Bermuda-based reinsurers equals one-third of total cessions in 2021. There are valid benefits and risks associated with this strategy, suggests the report, though the risks are unique to each insurer and cannot be generalised for the industry.
Many Bermuda reinsurers are sizeable entities and carry one or more financial strength ratings from major US rating agencies, says ALIRT, which is usually reflective of a highly-rated parent company.
The report notes that Bermuda’s regulatory regime is not drastically different from the US and the BMA’s capital requirements are equivalent to the European regulatory level (Solvency II).
It adds, “It appears that many life insurers that use Bermuda reinsurers benefit from incremental gains in the differences between GAAP/SAP and BMA/U.S. regulatory regimes, and any extra earnings and/or reserve/capital can prove important, especially amid the prolonged and continued low-interest rate environment.
“Most of the recent Bermuda reinsurance transactions executed with US life insurers were/are being conducted on an affiliated basis, which spurs the organisations involved to support their reinsurer(s), especially given the potential ramifications for the U.S. life insurer if an affiliated reinsurer faces financial difficulties.”
Also, the frequent use of modified coinsurance and funds withheld coinsurance helps to ensure US insurers are fully collateralised, which may limit credit risk, says the report.
Yet, with a sizeable and growing volume of business ceded outside the purview of US regulators, there is increasing concern among some industry participants regarding this practice.
The report concludes, “At the present time, there do not appear to be any major initiatives from the NAIC or state regulators to blunt the use of Bermuda/offshore reinsurance, though this could change if this trend becomes more ubiquitous throughout the life insurance and annuity industry.”
