Life re/insurance regulation requires a tailored and agile approach: BMA

Traditional supervisory approaches for insurance companies are challenging for regulation of asset intensive re/insurers in the life and annuity sector, according to the Bermuda Monetary Authority. 

Instead, partnerships between life re/insurers and asset management firms required a more tailored and agile approach to be successful, the Bermuda insurance regulator said in a recently released research paper. 

The paper, The Evolution of Asset Intensive  Insurance, updates previous research by the BMA and comes in response to increased scrutiny of the fastest growing segment of the Bermuda insurance market. 

“Strategic alliances between life and annuity insurers and asset management firms have played a significant role in narrowing the global protection gap, including in asset-intensive businesses,” the report said. 

“However these partnerships have led to a notable shift in traditional investment strategies and pose unique risks and supervisory challenges, including potential governance and conflicts and a tendency to invest in higher proportions of illiquid assets.” 

The report added: “The interplay between these two risk drivers poses challenges to traditional supervisory approaches. The BMA’s supervisory experience has shown that a more tailored and agile supervisory and regulatory approach that takes into account and specific characteristics and circumstances of the insurer is needed.”

The report said regulatory cooperation and collaboration between cedent and reinsurer regulators are “essential” for effective supervision. 

“This includes joint evaluation of the deals to identify risks and agree on mitigants; supervisory colleges and bilateral engagements; and joint onsite work focusing on key areas such as collateral arrangements.”   

The report said that following the 2008 financial crisis, low interest rates and tight credit spreads led to a shortage of capital for life and annuity insurers which was met by attracting new capital by using reinsurance to attract new sources of capital, including private equity. 

At the same time, the companies expanded investment management and origination capabilities through partners with asset management firms who also encouraged investments in less liquid and sometimes riskier assets. 

Bermuda benefited from these changes, with Bermuda-based life re/insurers seeing their statutory capital and surplus increase from $33 billion to $132 billion between 2016 and 2023. 

However, the changes in ownership and investment strategies meant that risks included conflicts inf interest, a focus on short term returns, misaligned incentives and risks from increased competition, plus an increase in investment in lower rated assets in some companies and a :susceptibility to investment in affiliated assets” in others, the report said.

As a result, the BMA has introduced several measures to regulate the risk, including increased cooperation with the cedents’ regulator and prior regulatory approval of all long-term block transactions and enhanced capital requirements. 

The BMA’s paper comes in the wake of the release of two consultation papers designed to improve regulation of investments and oversight of insurance groups with substantial operations in Bermuda. 

The consultations appear to be designed to improve regulation of life re/insurance groups and to clarify who should regulate insurers which are either headquartered in Bermuda or which are part of a larger group which has business outside of the insurance industry. 

Both areas have come under increased scrutiny in the wake of the 777 Re crisis, which underscored the concerns of regulators about the risks embedded in offshore reinsurers’ investment strategies.

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