Increased offshore reinsurance use raises concerns for life insurance sector: Moody’s
The increasing trend of offshore reinsurance being used by US life insurers, particularly in the US, Bermuda and the Cayman Islands, is raising concerns about counterparty risk and regulatory transparency, according to a new Moody’s report.
The ratings agency views this growing practice with caution, citing potential negative credit implications for the life insurance sector.
Driven by a strong US economic outlook and continued demand for life and annuity products, reinsurance activity has surged.
Strategic partnerships between private capital, including alternative asset managers, and life insurers have further fuelled this growth, according to the report, expanding balance sheets and increasing assets under management.
This has led to a significant rise in the use of offshore reinsurance and sidecars as insurers seek to improve capital efficiency, distributable earnings, and attract capital. Moody’s expects this trend to continue through 2025.
Since 2017, US life insurance and annuity reserves ceded offshore have ballooned to nearly $0.8 trillion, representing over 40% of total ceded reserves. Bermuda has become the primary destination for this offshore business.
While these arrangements allow insurers to exchange investment risk for reinsurer performance risk, the credit quality of these reinsurers becomes a critical factor.
Although Bermuda dominates the offshore market, Moody’s noted, cross-border transactions in recent years have also been reinsured from the US to Cayman Islands, accounting for approximately 9% of cross-border reinsurance from the US.
Analysts predict this activity in both jurisdictions will continue beyond 2024.
“The overall movement of business offshore is a net credit negative for the life insurance sector because of increased counterparty risk, less transparent financial regulation compared with businesses that reside in the US, as well as a lack of transparency around financial assumptions and disclosure on the reinsured business,” Moody’s stated.
Adding: “Insurance regulators are increasingly concerned about life insurers’ reliance on offshore reinsurance, and have emphasised a need for improved governance and transparency in these transactions.”