On the heels of the publication by the International Association of Insurance Supervisors (IAIS) of a draft consultation paper analysing the structural shifts in the life insurance sector to increase allocations to alternative assets and the prevalence of asset intensive reinsurance (AIR) transactions, the Bermuda Monetary Authority (the BMA) issued a paper on 21 March 2025, providing its own insights and reflections in the context of the Bermudian market (Paper). See our 21 March 2025 alert “International Association of Insurance Supervisors Consults on Structural Shifts in the Life Insurance Sector” for discussion of the IAIS report.
The BMA notes that, while cross-border AIR has expanded in “absolute terms” over the past five years, the proportion of AIR reinsured cross-border has remained stable. Insurers are increasingly seeking alternative sources of capital to support the demand for AIR, which in turn is fuelled by increasing demand for guarantee-type insurance and annuity products. Private capital is a key funding source, with the asset management opportunities presented by AIR providing an important mechanism to access this funding. Further, AIR is recognised as an indispensable tool for insurers, given the uncertainties being faced by the complex and long-term nature of the life and annuity business.
The BMA has implemented several regulatory measures to address the unique characteristics of AIR. These include transaction and asset approvals, bilateral engagements, liquidity stress testing, “proactive and intrusive” supervision, and quantitative and qualitative disclosures and disclosure requirements. These measures ensure the BMA’s regime remains fit-for-purpose, and have resulted in a material increase in the total asset requirements (TAR) of Bermuda’s long-term reinsurers.
AIR reinsurers in Bermuda maintain a robust solvency position, with a median solvency ratio of 259% as of year-end 2023 (far exceeding the minimum solvency ratio of 100%). The Paper notes that many (re)insurers seek high financial strength ratings, with the typical Bermuda (re)insurer target solvency ratio approximating 200%. The median solvency ratio for AIR shows that Bermuda (re)insurers are not only well-capitalised but also do not seek to lower total asset requirements.
Globally, the footprint of AIR is small, with technical provisions accounting for 5.3% of global life provisions (Bermuda’s share is more than a third of that amount, at 1.8%). The BMA is careful to note that, as insurance is generally “not systemic” and, as reinsurers act as risk absorbers rather than risk transmitters, Bermuda does not create or exacerbate systemic risk. Further, Bermuda AIR reinsurers have demonstrated resilience through various stress events, including COVID, and they predominantly operate on a collateralised basis, maintain strong liquidity, and hold diversified, high-quality investment portfolios.
The BMA continuously monitors AIR activities and trends to identify and mitigate any potential risks to the financial system. In addition it supports ceding regulators in fully observing the IAIS’ Insurance Core Principle 13 (ICP 13), regarding the management of the effective use of reinsurance.
Background Factors That Have Resulted In Increased Demand for AIR
The Paper sets out factors that have contributed to the rise in AIR, including the protection gap (the rising demand for guaranteed retirement income), which is described as “significant and expanding” estimated at $51 trillion in 2023, and the capital gap (rising demand for return of capital to public insurance company shareholders).
Some key factors leading to rising demand for guaranteed retirement income include:
- Demographic and economic factors: The growing number of retirees and higher interest rates together have increased demand for asset intensive insurance (AII) in the form of, for example, savings and retirement income insurance products and traditional annuities.
- Role of AIR: AIR, as the reinsurance of AII products, has been used in the life and annuity sector for nearly half a century. (We have seen even older examples.)
- Asset liability management (ALM): The need for robust ALM is the distinguishing factor for AII/AIR products, as it is rare for only investment risk to be transferred in AIR transactions; most often, both asset and liability risks are transferred.
- Shift in retirement income sources: The demand for AII has increased significantly over the past decade due to changes in the guaranteed nature of conventional sources of retirement income, such as the shift from defined benefit schemes to defined contribution schemes, and the weakening of social security and pension regimes in various markets.
The features of the capital gap include:
- Impact of the 2008 global financial crisis: The 2008 global financial crisis led to an extended period of low interest rates, narrow credit spreads and flat yield curves, which made it challenging for life and annuity insurers to generate sufficient returns.
- Capital return to shareholders: Due to these financial challenges, life and annuity insurers reduced growth and returned capital to shareholders. Over the last decade, public life and annuity insurers in Canada and the US returned approximately $275 billion to shareholders through share buybacks and dividends. In the U.K. and Europe, there has been a similar retrenchment.
- Shortfall in returns: The life insurance sector struggled to earn the returns needed to honour guarantees within insurance contracts while also meeting the required minimum cost of capital, which contributed to the withdrawal of public capital. Following the global financial crisis, the life sector is estimated to have fallen short of its cost of capital by almost 5% per year on average.
Increased Demand for AIR
As a result of these developments, insurers are increasingly looking for alternative sources of capital to fund new business growth. As mentioned, private capital has emerged as a key source. Insurers (or reinsurers) have formed partnerships with other institutional investors to maintain financial flexibility and enhance underwriting capacity. The Paper notes that cross-border ceded reserves have increased from 16% in 2017 to 40% in 2023 due to the accumulation of long-term reinsurance transactions.
Bermuda’s Ecosystem and AIR
Bermuda has longstanding experience of over 40 years in insurance and reinsurance. It is a key jurisdiction in addressing the evolving challenges in insurance, including the life insurance, savings and retirement/annuity sectors.
The Paper illustrates the following noteworthy features of the Bermudian ecosystem:
- A wide range of AIR businesses is undertaken in Bermuda.
- There is a high level of diversification in Bermuda’s P&C and long-term insurance sectors.
- Responsible innovation is a defining feature:
- Sidecars, cited as an example, enable (re)insurers to access capital funding from diversified capital providers such as pension funds, asset managers, family offices, sovereign wealth funds, other foreign insurers and high-net worth individual investors.
- Unlike sidecars in the non-life sector, which are short-term (as defined under ICP 13.6), AIR sidecars assume both asset and liability risk for the long term and are regulated the same way as any other AIR reinsurer.
- Bermuda has a deep talent pool of actuarial, legal and advisory services for complex capital reinsurance transactions.
- Bermuda’s geographic location and global nature enhance its appeal.
- Life insurers in the US and Bermuda have relatively similar investment allocations, and about 70% of Bermuda’s long-term market is business with the US.
In addition, the BMA said it plans to issue further papers on the growing use of sidecars in the jurisdiction.
Regulatory Environment
Bermuda is a highly attractive destination for AIR transactions, given that (i) it has Solvency II/UK equivalence; (ii) it has NAIC Qualified and Reciprocal Jurisdictional Status; and (iii) complies with the IAIS’ ICPs, all of which taken together provide a good basis to supervise AIR.
In addition, the BMA takes an active approach to supervision, reacting to market developments. In the past two years, the BMA has introduced changes to the valuation regime, including technical, governance and disclosure updates. The BMA has introduced prior approval for the use of the scenario-based approach and enhanced lapse and expense capital charges. These changes have had a substantial impact on the TAR for asset-intensive reinsurers. Since January 2023, the BMA has required approval for all closed block life reinsurance transactions. The BMA employs targeted prudential measures, such as higher solvency levels, capital add-ons, reserve add-ons, dividend restrictions, and liquidity and capital maintenance arrangements, to address transaction-specific risks.
In addition, there are high-bar approval processes for affiliated and/or connected annuities and/or long-duration life insurance products, related-party assets, enhanced liquidity and stress testing requirements, and the requirement of a large portion of the market to prepare recovery plans. There is a current consultation on the application of the Prudent Person Principle (PPP), intended to address observed shifts in the investment landscape.
With respect to reporting, the BMA has introduced enhanced reporting requirements for lapse, liquidity and assets, including asset reporting at the CUSIP/position level. The BMA has conducted thematic studies and published white papers on various topics, such as the supervision and regulation of private equity insurers, market analysis and stress testing, liquidity risk, collateral structures and private credit. The BMA has also proposed enhancements to the public disclosure regime, including public disclosure of assets at the CUSIP/position level, product-level liabilities and additional asset liability management disclosures.
Analysis of AII and AIR Data
The BMA notes that discussions about AII and AIR, whilst welcomed, have often been anecdotal, with no data to support the views expressed. To assist, in the appendix to the paper, the BMA has published key observations from BMA data-driven reports with respect to the Bermuda long-term market.
Various stakeholders have shown a keen interest in understanding AIR, and its risks and drivers. The BMA have observed that the demand for AIR, stems from policyholder demand, rather than being motivated by leveraging capital and reserve differences, which is sometimes claimed to be the case. Most AIR transactions are collateralised through Funds Withheld (FWH) or Modified Coinsurance (ModCo) structures, where the assets held as collateral are at least equivalent to the reserves calculated based on the cedant’s reserving method. Often FWH or ModCo accounts are overcollateralised, which means the assets held exceed the reserves in the ceding jurisdiction. The BMA reviews the collateral requirements proposed, and reinsurers are required to demonstrate that they adequately safeguard policyholder interests. In addition, the BMA reviews proposed asset allocations and, as appropriate, confirms that these align with the PPP.
Regulatory Collaboration
The BMA agrees with the IAIS that a key challenge in supervising AIR, is the existence of knowledge gaps in prudential frameworks, and obstacles to exchanging information that may hinder effective supervision. Like the IAIS, the BMA is encouraging transparent regulatory cooperation across jurisdictions and between regulators, which it views as essential in promoting effective supervision of AIR transactions. The BMA notes that it has shown a strong commitment to working with cedant regulators through group supervision (supervisory colleges and joint on-site reviews) and regulator-to-regulator requests. Further, approval of block transactions, involves discussions with cedant regulators.
Financial Stability of the Bermuda Market
Approximately 80% of Bermuda’s reinsurance business takes place on a collateralised basis, meaning the assets are largely held on the cedant reinsurer’s balance sheet, which the BMA considers to significantly reduce the potential for a build-up of concentration or systemic risk exposure within Bermuda. It considers the possibility for AIR in Bermuda to pose a financial stability risk to be extremely remote.
The BMA cites requirements for Bermudian insurers to undertake rigorous and comprehensive forward-looking stress tests, including on liquidity and lapses. With respect to liquidity, Bermuda’s long-term insurers maintain a substantial portion of their assets in liquid forms, such as cash, corporate bonds and sovereign securities. This diversification against less liquid assets on the balance sheets results in long-term insurers in Bermuda having relatively high liquidity coverage ratios (median 418% post 1-200 years stress test), which indicate sufficient liquid assets that can be used to meet (immediate) outgoing liability cashflows in a stress event that impacts both assets and liabilities adversely.
Applicability of the IAIS’ ICP 13 Governing Reinsurance Oversight
The BMA aligns its regime with international standards and applies the ICPs set by the IAIS. Specifically, ICP 13 is relevant to the reinsurance oversight, providing criteria for supervisors to consider with respect to the suitability and impact of reinsurance programmes. An additional focus on the particular features of an AIR means consideration of, for example, assets, sidecars, concentrations, recapture, ongoing risk appetite and group-wide supervision.
The BMA ensures compliance with ICP 13 through a structured supervisory approach that addresses six key standards: (1) reinsurance programme oversight, (2) internal controls, (3) economic impact of risk transfer, (4) cross-border reinsurance supervision, (5) liquidity management considerations and (6) risk transfer to capital markets.
The BMA notes that, with respect to AIR:
- The BMA reviews recapture provisions in reinsurance agreements, especially in asset-intensive transactions, to evaluate whether the assuming jurisdiction has appropriate legal and regulatory mechanisms to facilitate asset recovery if required.
- Most investments are in the ceding jurisdiction, and governed under the laws of the ceding jurisdiction. Therefore, the BMA also assesses that assets held on the Bermuda balance sheet are permissible in the ceding jurisdiction.
- The BMA examines whether reinsurers implement effective measures to safeguard assets associated with assumed risks, ensuring they remain available to meet policyholder obligations.
- Structures such as FWH and ModCo serve to ring-fence assets, in this case, making it easier for the ceding regulator to identify which assets back a specific block of business.
- BMA regulators closely monitor concentration and interconnectedness across reinsurance counterparties and investment exposures to evaluate and mitigate potential systemic risks.
- Supervisors assess whether (re)insurers maintain diversified risk profiles, preventing excessive reliance on single counterparties under stress.
- Any noted risks or deteriorations are discussed bilaterally with the ceding regulator.
- The BMA may conduct joint on-site with ceding regulators to ensure a shared understanding of risks and their management.
- The BMA enforces transparency requirements, benefitting the cedent supervisor’s oversight processes, and requiring reinsurers to provide detailed disclosures on their financial condition, reinsurance programmes and capital adequacy through financial condition reports and GAAPs.
- The BMA takes into account both prudential considerations and the ceding regulator’s requirements, concerns or feedback through the transaction approval process. No transaction is approved if the cedent regulator has unresolved concerns.
Conclusion
The BMA has provided a comprehensive reflection on the use of AIR in Bermuda, in a timely manner, given the ongoing IAIS consultation on the topic.
The BMA’s insights and reflections on AIR highlight the importance of regulatory flexibility and cooperation across jurisdictions to promote effective supervision of AIR transactions. The BMA’s proactive measures and robust supervisory framework aim to position Bermuda as a leading destination for AIR transactions, on a continuing basis, by ensuring financial stability and policyholder protection in the evolving life insurance sector.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.
