Offshore Reinsurance Deals Surge, Raising Scrutiny
Recent large reinsurance deals highlight the increasing prevalence of U.S. life insurers transferring assets offshore, primarily to Bermuda. While offering certain financial advantages, this trend is generating concerns about regulatory oversight and potential risks to policyholders.
Resolution Life recently announced a substantial agreement, ceding a $9.7 billion portfolio from Protective Life Corp. This deal encompasses structured settlement annuities and secondary guarantee universal life business. According to Resolution Life’s March 7 news release, Protective Life will continue to administer the policies affected by the agreement.
“This strategic transaction with Protective showcases our ability to manage complex life and annuity products at scale,” said Warren Balakrishnan, CEO of Resolution Life. “This transaction is a great example of our reinsurance offering to the U.S. life and annuity market.”
The Appeal of Offshore Reinsurance
The practice provides life insurers with more investment options, along with access to increased scale and new business opportunities. Fitch Ratings notes a marked upward trend in transferring blocks of life and annuity policies offshore, fully expecting it to continue. U.S. life insurers have nearly doubled the amount of their ceded reserves since 2019, increasing from $710 billion to $1.3 trillion in 2023.
During the same period, reserves ceded to offshore jurisdictions nearly quadrupled, surpassing $450 billion. Bermuda accounts for approximately 80% of this offshore reinsurance by reserves.
Concerns Emerge
Despite the benefits, the move is not without its critics. Tom Gober, a certified fraud examiner with expertise in life insurance, expressed concerns about regulatory oversight. “To me, it’s troubling that the regulators in the U.S. who are supposed to protect U.S.-domiciled policyholders would defer to Bermuda or anywhere else, just because of a reinsurance contract with an offshore affiliate,” he stated.
Moody’s has also voiced concern about counterparty risk and regulatory transparency in the offshore reinsurance trend. In a recent report, the ratings agency cited potential negative credit implications for the life insurance sector. The report stated that increased counterparty risk, less transparent financial regulation, and a lack of transparency around financial assumptions and disclosure on the reinsured business are net credit negatives.
Bermuda’s Advantage
Bermuda’s attractiveness as a reinsurance hub is multi-faceted. The island nation imposes no corporate income tax, capital gains tax, or dividend tax, making it financially appealing. It also permits alternative risk transfer mechanisms like catastrophe bonds and Insurance-Linked Securities. Additionally, Bermuda’s regulatory framework is deemed equivalent to EU’s Solvency II rules.
Furthermore, Bermuda follows GAAP (Generally Accepted Accounting Principles) rules, which allows insurers to defer liabilities, explained Gober. For example, when an insurer pays agent commissions, GAAP reporting allows the deferral of those expenses over the life of the policies. The reason this matters, Gober explained, is that “that money is gone when you pay those agents.”
While offshore reinsurance frequently functions without issues, problems can arise. “If the offshore company has far less [reserves] than what they need for that block of business,” Gober noted, “then under a period of economic stress, the U.S. carrier might demand its money back, and the funds won’t be there.”
The 777 Partners Case
The situation with 777 Re, the Bermuda-based reinsurance arm of 777 Partners, highlights the worst-case scenario. 777 Partners, based in Miami, is facing multiple lawsuits alleging financial improprieties, including accusations of fraudulently borrowing hundreds of millions of dollars, money laundering, and unpaid debts. Subsidiary 777 Re had reinsurance agreements with several U.S. life insurance companies.
The conduct of the parent company drew the attention of regulators and analysts to 777 Re. Some life insurers recaptured their blocks reinsured by 777 Re. However, Advantage Capital Partners (A-Cap) saw a business interruption after regulators in Utah and South Carolina banned Sentinel Security Life Insurance Co. and Atlantic Coast Life Insurance Co., respectively, from writing new business, leading to disputes over valuations.
Suzanne Williams-Charles, CEO of the Bermuda International Long Term Insurers and Reinsurers association, stated that the regulatory regime in Bermuda is meeting current challenges. “When I look at the enhancements that the [Bermuda Monetary Authority] has recently introduced, included in those enhancements are measures that would likely help eliminate the situation recurring,” she explained. The BMA now requires all transactions with affiliates to be pre-approved and has introduced requirements for firms to demonstrate investment decisions are made in the best interest of policyholders.
Next Steps
Part two will explore the efforts by the BMA and the National Association of Insurance Commissioners to increase regulations of offshore reinsurance.
