The Bermuda Monetary Authority’s latest white paper (BMA) outlines the prudential risks and supervisory challenges associated with asset-intensive reinsurance (AIR) and examines the growing role of asset management firms in the long-term insurance sector.
The BMA highlights the regulatory enhancements it has introduced to address these risks and proposes further supervisory measures.
The white paper builds on the BMA’s December 2023 report and incorporates insights from three market papers published in 2024, which analyzed private credit, collateral, and liquidity risks in the long-term insurance sector.
In its report, Kennedys Law notes that the paper provides context for two ongoing consultations related to investment risk management and public disclosure of insurers’ investments.
Asset-intensive business in Bermuda expanded significantly following the global financial crisis as the life insurance sector sought alternative capital sources through reinsurance. Private equity firms, institutional investors, and alternative asset managers have played an increasing role in this market, contributing to the growth of statutory capital and surplus within Bermuda’s long-term insurance sector.
While these developments have strengthened investment management and asset-liability matching capabilities, the BMA has identified prudential risks related to governance, conflicts of interest, and risk management. Kennedys Law points out that these risks are compounded by a tendency toward higher allocations of illiquid assets, which present valuation, concentration, and complexity challenges.
The BMA highlights concerns about potential undue influence from asset managers over insurers’ strategies, capital management, and asset allocation. Weak governance structures and insufficient board oversight could lead to investments that do not align with policyholder interests.
The BMA suggests that cultural behaviors, rather than structural deficiencies, have contributed to past governance failures. In response, it is proposing increased scrutiny of insurers' application of the Prudent Person Principle (PPP) and improvements in investment risk management practices.
Short-term capital commitments in asset-intensive reinsurance present additional supervisory challenges. The BMA is considering targeted supervisory interventions, such as dividend restrictions, capital maintenance agreements, and higher solvency requirements, to mitigate risks where a short-term focus could affect policyholder protection.
Kennedys Law notes that the BMA is also assessing the appropriateness of asset under management (AUM) fee structures in asset manager-owned insurers. Some Bermuda reinsurers retain a portion of AUM fees, releasing them only when liabilities are fully run off, a practice that may be explored further.
Competition in the life insurance and reinsurance market is another factor influencing risk-taking behavior. In a high-interest-rate environment, non-insurance financial institutions, including banks, are offering products that compete with those in the insurance sector. This can create pressure to offer unsustainable crediting rates, which may lead to more aggressive risk-taking in asset allocation.
The BMA has responded by introducing enhanced investment reporting, stricter supervision of private credit, and ongoing consultations on public disclosure of insurers’ assets. Kennedys Law notes that the BMA is calling for a more tailored regulatory approach for AIR, including more frequent inspections, detailed reporting, and enhanced stress testing.
Transparency around value extraction by asset managers is another focus of the BMA’s recommendations. There is a risk that pricing arrangements between insurers and affiliated asset managers may not be conducted on an arm’s-length basis. The BMA is encouraging insurers to improve public disclosure of cash and non-cash flows between them and their affiliated asset managers to address this concern.
Cedents engaged in asset-intensive reinsurance transactions are also advised to strengthen risk management practices. The BMA recommends that cedents disclose to their regulators whether their asset allocations align with policyholder obligations.
Kennedys Law highlights that the BMA is calling on regulators in other jurisdictions to evaluate and, if necessary, enhance their supervisory frameworks to ensure effective oversight of AIR risks.
The BMA supports initiatives that require ceding insurers to demonstrate adequate risk management controls to identify, measure, monitor, manage, and report the risks associated with AIR transactions.
The White Paper reinforces the BMA’s position on evolving regulatory expectations for asset-intensive insurers and underscores the need for ongoing collaboration between Bermuda and other regulatory jurisdictions to address emerging prudential risks.
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