Bermuda Offshoring Could Make Annuity Issuers Look Too Good: Moody's

What You Need to Know

Bermuda meets the global Solvency II standards and is upgrading its rules.
Using offshore reinsurance can help a U.S. life insurer reduce the amount of capital needed to support a given amount of business.
The U.S. insurer may also be able to invest its capital in higher-risk asset classes.

Some U.S. life insurers use reinsurance from providers based in Bermuda and other offshore jurisdictions to cut the amount of capital supporting their products, invest the capital more aggressively and come away with nicer-looking risk-based capital ratios, according to a team at Moody’s Investors Service.

Bob Garofalo and other analysts at Moody’s have prepared a new report, backed with a close look at the regulations in Bermuda and other offshore jurisdictions, and detailed financial figures, to address a concern that insurance agents, regulators and others have been talking about for several years: whether the flurry of announcements about life insurers working with offshore reinsurers, and setting up their own offshore reinsurers, is something to worry about.

The Moody’s analysts answer: Sure.

“There are valid reasons for conducting reinsurance business offshore; each insurer has its own motivations for doing so,” the analysts say.

But “the overall movement of business offshore is a credit negative for the life insurance sector, because this business provides less transparency for investors and is generally subject to less regulation than business that resides onshore in U.S.-regulated entities,” the analysts warn. “Furthermore, offshore entities tend to hold less capital than onshore entities.”

What It Means

Analysts at Moody’s think you should consider whether the companies that provide your clients’ life insurance polices and annuities have used offshore reinsurance to cast their finances in a flattering light.

Moody’s Ratings

Moody’s is one of the United States’ nationally recognized statistical rating organizations —credit rating agencies that U.S. companies can use to meet requirements set by the Securities and Exchange Commission and other federal regulators.

Its ratings have a direct effect on whether companies can borrow money, how much they pay to borrow money, whether they can write insurance that comes with long-term guarantees and how much they can charge for products like life insurance policies and annuities.

The new offshore reinsurance report, which was published behind a login wall, is not a credit rating action, but it reflects the thinking that could go into future rating actions at Moody’s and other rating agencies.

Offshore Life Reinsurance Background

Reinsurance is a form of insurance for insurance companies. A U.S. life insurer may use reinsurance either to protect itself from catastrophic risk or to transform the structure of the risk, by, for example, putting another company in charge of handling unwanted blocks of life insurance or annuity business.

If a life insurer “cedes,” or sends, some of the business it wrote to a reinsurer, and the reinsurer fails, the life insurer must “recapture” the business that was ceded, or take it back.

U.S. life insurers have ceded life and annuity business backed by about $800 billion in reserves to offshore reinsurers since 2017, and Bermuda-based reinsurers handle 83% of the offshore reinsured business, according to the Moody’s analysts.

Companies backed by private equity firms have arranged many of the reinsurance deals.