Offshore life reinsurance a credit negative, says Moody's

The movement of life reinsurance offshore is a credit negative for the US life insurance sector, Moody's Ratings has asserted. 

The ratings agency made the claim in a report on the growth of life reinsurance in the Cayman Islands. 

US life and annuity insurance ceded to offshore domiciles has grown rapidly in the last decade. Bermuda is the destination for 81% of offshore reinsurance while Cayman has risen to take 9%. The next largest domicile is Barbados, with 4%. 

“The overall movement of business offshore is a net credit negative for the life insurance sector because of increased counterparty risk, less international recognition and less transparent financial regulation compared with businesses that resides onshore in the US, as well as a lack of transparency around financial assumptions and disclosure on the reinsured business,” said Bob Garofalo, lead author and senior credit officer at Moody’s Ratings. 

The US life insurance sector is the key market for business activity in the Cayman Islands, with around $87 billion of reserves reinsured as of 31 December 2023, Moody's said. A significant amount of the activity in recent years, around 54% of reserve credits, is with private capital-backed reinsurers.

"Although significant, the amount is modest compared to the more than $5 trillion of cash and invested assets held by US life insurers' general accounts," the report added. 

"Perceived benefits of life reinsurance activity come with risks," it said. "The use of reinsurance capacity is positive for the growth prospects of the cedent or sponsor as the offshore reinsurer enables the cedent to manage on an economic basis its reserves and capital in a transaction often resulting in reduced assets and lower capital to support the business.  

"Reinsuring business offshore also comes with risks, notably counterparty exposure."

It added: "Cayman Islands will need to receive recognition from other regulatory regimes before it can become a major destination for the US life industry, something we believe Cayman Islands Monetary Authority is focused on achieving over the long run.

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