Offshore Reinsurance Faces Increased Regulatory Scrutiny
Insurers’ regulators are often slow to act, so it was noteworthy when the Life Actuarial Task Force (LATF) released a proposal in February 2024 to enhance how they test the reserves that support offshore reinsurance deals. The life insurance industry has become more financially complex. The regulators are seeking to understand the risks that come with these complex deals.
“The ability of insurers to significantly lower the total asset requirement for long-duration blocks of business that rely heavily on asset returns appears to be one of the drivers of the significant increase in reinsurance transactions,” according to the proposal, which came from David Wolf, the acting assistant commissioner for the New Jersey Department of Banking and Insurance, and Kevin Clark, the chief accounting and reinsurance specialist with the Iowa Insurance Division.
The Boom in Offshore Reinsurance
Once investment firms took an ownership interest in life insurers, offshore reinsurance deals boomed. In a recent report, Fitch Ratings noted that U.S. life insurers have nearly doubled 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, exceeding $450 billion.
Reinsurance is no longer a straightforward transaction. A private equity company might be reinsuring a block of business with its own reinsurer and claiming assets from an affiliated entity. The modified coinsurance reinsurance trend allows a ceding insurer to retain both assets and statutory reserves while transferring the risk of the reinsured policies to the reinsurer.
The Regulatory Concerns
The implications of a financial catastrophe are obvious to regulators. “Regulators are concerned that the level of policyholder protection may be declining,” the Wolf/Clark proposal stated.
Larry J. Rybka, chairman and CEO of Valmark Financial Group, offers a critical perspective. Rybka, whose career spans 38 years of industry experience, recalls the mispricing and collapse of long-term care insurance, as well as annuities with living benefits and life insurance with long-term guarantees.
At the time, reserving for these different product innovations was considered “redundant,” Rybka noted. “Now, 20-25 years later, in retrospect these reserving assumptions were not conservative enough.”
Rybka objects to the ongoing LATF efforts to create an asset adequacy testing “guideline” for offshore reinsurance agreements, calling it “window dressing.” Regulators hope to have the guideline in place by the end of 2025.
He argues that the proposed guideline doesn’t give the appointed actuary the power to require additional reserves. “Essentially, if the actuary hired by the carrier thinks its boss needs to set more money aside to cover the promises made to policyholders, the actuary needs to put it in a report,” Rybka said.
Brian Bayerle, chief life actuary for the American Council of Life Insurers, urged regulators to give appointed actuaries “a degree of flexibility … in their assessment of the adequacy of reserves.” The actuary must align their work with the offshore jurisdiction’s regulatory framework, noted Bayerle.
Bermuda’s Response
The Bermuda Monetary Authority (BMA) is also feeling the pressure to better regulate its booming reinsurance sector. The BMA’s 2025 Business Plan includes a proposal for “enhanced public disclosure requirements on investments for long-term commercial insurers.” The authority is also considering strengthening its treatment of structured products and loans.
“In our regulatory initiatives, customer protection will remain at the forefront in 2025,” said Craig Swan, CEO of the BMA. Swan could not be reached for comment.
Suzanne Williams-Charles, CEO of the Bermuda International Long Term Insurers and Reinsurers association, explained the island’s concerns about how it is perceived around the world.
The Cayman Islands’ Role
While Bermuda is the predominant offshore location, Fitch Ratings estimates that a small percentage of offshore reinsurance is in the Cayman Islands. Captive Review recently reported that the number of reinsurance companies in Cayman has grown from 58 writing $9.3 billion in 2020 to 94 writing $25.2 billion by the end of Q3 2024.
Athene Life & Annuity, a subsidiary of Apollo, remains the No. 1 seller of annuities. In a quarterly earnings call, Apollo CEO Marc Rowan challenged U.S. regulators to get a handle on the Cayman Islands market.
Greg Mitchell, chairman of the board of directors at the Cayman International Reinsurance Companies Association, joined a March LATF call to reassure NAIC regulators. “Under the Credit for Reinsurance model [regulation], we have to fully collateralize at no less than the U.S. [statutory] reserve,” he explained.
The Future of Offshore Reinsurance
Fitch Ratings expects the offshore reinsurance trend will continue. Booming annuity sales are a main driving force. According to LIMRA’s Fact Tank, annuity sales increased from $255 billion in 2021 to $313 billion in 2022, $385 billion in 2023, and $432 billion in 2024.
Jamie Tucker, senior director and life insurance sector head for Fitch Ratings’ North American Insurance Ratings Group, is concerned about “unsustainable growth,” or insurers growing much faster than the industry. The National Alliance of Life Companies is also concerned that its members could be squeezed out by heavier regulations.
“Smaller and mid-sized insurers operate with leaner resources compared to larger market players,” wrote Scott Harrison, CEO of NALC, in a letter to the LATF. The association is concerned about the added overhead costs involved.
