Critics multiply as state regulators attempt to rein in offshore reinsurance

State insurance regulators are not known for making bold moves or acting quickly. That history made it more newsworthy when the Life Actuarial Task Force released a proposal in February 2024 to enhance the testing of reserves supporting offshore reinsurance 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,” reads the proposal from David Wolf, acting assistant commissioner for the New Jersey Department of Banking and Insurance, and Kevin Clark, chief accounting and reinsurance specialist with the Iowa Insurance Division.

The effort is seen as regulators seek to get a handle on a life insurance industry that has become more financially complex. Once investment firms took an ownership interest in life insurers, offshore reinsurance deals boomed.

U.S. life insurers have nearly doubled their ceded reserves since 2019, increasing from $710 billion to $1.3 trillion in 2023, Fitch Ratings noted in a recent report. During the same period, reserves ceded to offshore jurisdictions nearly quadrupled, exceeding $450 billion.

80% of offshore reinsurance is in Bermuda

Bermuda represents approximately 80% of offshore reinsurance by reserves.

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 but transfer the risk of the reinsured policies to the reinsurer.

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 said.

Not conservative enough

Larry J. Rybka is chairman and CEO of Valmark Financial Group. His 38 years in the business nearly parallel the rise, 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, company actuaries argued that reserving for these different product innovations was “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.

But Rybka and other critics say it does not even give the appointed actuary the right to require additional reserves. If the actuary finds reserves lacking, they should “reflect that in their actuarial opinion,” the guideline states.

“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 in a comment letter to the LATF. “It’s not hard to envision said report being filed away with little attention given to its ‘recommendations.’ ”

Meanwhile, 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 regulatory framework of the offshore jurisdiction, he noted in a comment letter.

Meanwhile, in Bermuda

The Bermuda Monetary Authority is feeling the pressure to better regulate its burgeoning reinsurance sector as well. Ironically, the BMA begins its 2025 Business Plan by comparing itself to Rudy Ruettiger, the subject of the 1993 movie “Rudy.” An undersized afterthought, Ruettiger bucked the odds to make the Notre Dame football team in 1974-75.

While the BMA might feel it is battling overwhelming odds, it is not backing away. Its 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, spent 10 years as a deputy director at the BMA. The island is very concerned about global perceptions that it permits freewheeling financial impropriety, she said.

A BMA consultation paper is specifically directed at increasing the level of transparency as it relates to the investment portfolios and the liabilities, and “essentially what the companies are actually doing,” Williams-Charles explained.

“The frameworks in Bermuda for transparency are very well established, but I think that there will always be this underlying offshore perception,” she added. “So, I think that Bermuda has had to work very hard to consistently remind key stakeholders and policyholders of the frameworks that are in place and how robust they are.”

The Caymans are in play

Not all reinsurance is parked in Bermuda. Fitch Ratings estimates that a small percentage of offshore reinsurance is in other jurisdictions, notably, the Cayman Islands.

The number of reinsurance companies in Cayman has grown year on year, from 58 writing $9.3 billion in 2020, to 94 writing $25.2 billion in 2024 by the end of Q3, Captive Review recently reported.

The Cayman Islands Monetary Authority found itself in the news last month after Marc Rowan, CEO of Apollo Global Management, blasted regulators for being “asleep at the regulatory switch” while “$150 billion of reserves have moved offshore to Cayman Islands with a fraction of the capital of the U.S. or the Bermuda system, putting the system at risk.”

Athene Life & Annuity, a wholly owned subsidiary of Apollo, remains the No. 1 seller of annuities. Athene Life Re touts itself as “one of Bermuda's [l]argest annuity reinsurance companies as measured by capital base.”

In his comments made during a quarterly earnings call, Rowan challenged U.S. regulators to get a handle on the Cayman Islands.

“The state-based regulatory system, which we believe in and are being supportive of, they have a choice of evolving to address this issue in payments, or risk someone stepping in and usurping their authority,” Rowan said.

Perhaps not coincidentally, 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. “So, regardless of what the reinsurer holds as an assumed reserve, we're still collateralizing with the full U.S. stat.”

A trend that will continue

Fitch Ratings expects the offshore reinsurance trend to continue to thrive. Booming annuity sales are a main driving force. Annuity sales increased from $255 billion in 2021 to $313 billion in 2022, $385 billion in 2023, and $432 billion in 2024, according to LIMRA’s Fact Tank.

Within this business environment, however, the rating service has concerns about “unsustainable growth,” or insurers growing much faster than the industry.

“That can be an indicator of insurers potentially sacrificing profitability for topline growth,” said Jamie Tucker, senior director and life insurance sector head for Fitch Ratings' North American Insurance Ratings Group. “If someone's motivated to grow, they could offer the highest credited rate, and perhaps easily grow that top line. But over time, that'll be reflected in the financials.”

Meanwhile, the National Alliance of Life Companies is concerned that its members, more than 50 small- to mid-sized life insurers, could be squeezed out by the push for heavier regulations on offshore reinsurance.

“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 guideline introduces significant additional overhead costs needed to perform asset adequacy testing for ceded business.”

The additional cost of regulation would impact other parts of the business and increase the costs passed on to the consumer, Harrison added.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.