Japanese life insurers could face unexpected capital pressures if their offshore reinsurance partners encounter financial difficulties, potentially reversing some of the benefits gained from transferring long-term liabilities, Moody’s Ratings has warned.
In an October 27 analysis, the ratings agency said the growing use of asset-intensive reinsurance (AIR) has helped insurers improve capital efficiency and reduce exposure to legacy policies, while increasing their dependence on reinsurers, particularly those based in Bermuda.
If a reinsurer encounters financial difficulties, an insurer may have to bring previously transferred business back onto its balance sheet, a process known as recapture. This could increase capital requirements and create additional pressures during a market downturn, raising concerns about insurers' long-term financial strength.
AIR has become an increasingly important capital management tool in Japan as insurers seek to improve shareholder returns and reduce interest rate risks associated with older policies, including those issued during the late 1980s and early 1990s with relatively high guaranteed returns.
The introduction of Japan's new economic solvency framework, known as J-ICS, at the end of March 2026 has provided another incentive to manage these risks through reinsurance.
Recent transactions illustrate the shift. Japan Post Insurance expanded its Bermuda reinsurance arrangements with Aflac Re Bermuda and Talcott Life Re in March 2026, while Sumitomo Life entered into a block coinsurance agreement with Reinsurance Group of America.
Data from the Bermuda Monetary Authority showed that Japan accounted for US$106.1 billion in reinsurance liabilities ceded to Bermuda-based reinsurers at the end of 2024, second only to the United States at US$396 billion. The figures cover reinsurance liabilities more broadly, rather than AIR transactions alone.
Moody’s warned that this concentration could expose Japanese insurers to wider financial market disruptions, particularly if Bermuda-based reinsurers hold similar investment portfolios.
The growing involvement of private equity-backed reinsurance platforms adds to these risks, with some investments concentrated in asset classes such as private credit. A significant downturn could weaken multiple reinsurers simultaneously, affecting asset values and liquidity.
Although insurers typically work with highly rated reinsurers and require collateral, these safeguards may come under pressure during severe market stress.
The expansion has also attracted regulatory attention. In July 2026, Japan's Financial Services Agency introduced revised reinsurance supervisory guidelines to strengthen oversight of counterparty exposure and the potential consequences of recapturing transferred liabilities.
The changes reflect concerns over whether existing risk management arrangements would remain effective during severe financial stress, as Japanese insurers' growing AIR exposure has yet to be tested under such conditions.
International regulators have raised similar concerns. The International Association of Insurance Supervisors identified recapture, concentration and investment risks as areas requiring closer monitoring in November 2025, although it found that systemic risks appeared limited at the global aggregate level based on available evidence.
Moody’s considers AIR generally positive for insurers' credit profiles, but cautioned that its benefits depend on effective risk management. As more liabilities move offshore, the financial strength of reinsurers and the quality of assets supporting these arrangements will remain important to insurers' ability to meet long-term policyholder commitments.
