About 30% of total life/annuity (L/A) premiums ceded by U.S. insurers are sent to offshore affiliates as multinationals seek out opportunities for capital and tax efficiencies, however, A.M. Best highlighted in a special report that ceding to unaffiliated offshore reinsurers can bring additional risks.
The rating agency cautioned firms to do due diligence on counter party risk, explaining that; “offshore reinsurers may have shorter set-up time and limited track records or operating history and may lack a financial strength rating, and their management teams might not have as robust a reinsurance background.
“Further, the cedent must monitor the collateral offered by the offshore reinsurer, including total amounts as well as the timing for true-ups, and may be required to pay federal excise tax if applicable.”
To monitor counterparty risk, insurers can use ratings reports focusing on trends, market surveys, and relative exposure to the reinsurer.
In addition, cedants can use counterparty diversification, the use of collateral, and ratings triggers to help mitigate any impact from a reinsurer’s insolvency.
The recent termination of agreements with Beechwood Re by several insurers after the firm was accused of having managed assets that fail to comply with guidelines because of exposure to hedge fund manager Platinum Partners, is one example of potential complications arising from counterparty risk.
A.M. Best noted that in efforts to reduce counterparty credit risk, primary L/A insurers tend to cede more business to organizations with high financial strength ratings.
In 2016 Barbados was home to the most offshore cedance by life/annuity insurers with 9.5% of the market share; this was followed by Ireland with 7% and Bermuda with 4.7%.
Reportedly, most Barbados insurers are used for affiliated intercompany transactions, nonaffiliated use is seen primarily in retrocession.
Based on A.M. Best measurements of face amounts assumed from unaffiliated firms, in 2016, the market share of the top 10 reinsurance organizations to which the U.S. domiciled L/A primary insurers are ceding business has increased significantly from 65.6% in 2006 to 83%.
The largest allocation increase was seen in group yearly renewable term arrangements, which accounted for 16.5% of the total face amount ceded in 2016, up from 1.1% in 2006.
The use of ceded individual coinsurance with funds withheld arrangements has also more than doubled since 2006, with ceded amounts growing from 8.8% to 15.7% in 2016.
Despite the additional risks that can arise from unaffiliated offshore cedance, the trend of L/A insurers increasingly relying on offshore risk transfer has grown in recent years, most notably in group yearly renewable term arrangements.
