The continued expansion of offshore life reinsurance activity is increasing counterparty risk, according to the latest insights from Moody’s.
The report notes that life insurers are shifting reinsurance operations offshore, primarily from the United States to Bermuda and the Cayman Islands, in efforts to manage capital, expand business, and improve financial efficiency.
This growing use of nonaffiliated and affiliated reinsurers, along with sidecars, reflects a broader strategy to optimize capital deployment and attract investment, Moody’s says. However, the credit agency views the trend with caution due to concerns over regulatory transparency and financial disclosure.
As offshore reinsurance transactions increase, the report explains that insurers are exchanging direct investment risk – typically used to support policyholder liabilities – for exposure to the financial stability of offshore reinsurers.
Moody’s notes that while these arrangements can enhance capital efficiency, they also introduce additional counterparty risk and regulatory oversight challenges.
US insurance regulators have expressed concerns about the lack of transparency in offshore reinsurance deals, emphasizing the need for stronger governance and clearer financial disclosures. Last year, following a National Association of Insurance Commissioners’ (NAIC) meeting, the association flagged the issue as critical amid broader discussions about transparency and risk.
The role of mergers and acquisitions (M&A) in reshaping the life insurance sector is also contributing to changes in reinsurance activity. According to Moody’s, private capital, including alternative asset managers, has increased its presence in life insurance, consolidating life and annuity liabilities while expanding into new business lines, particularly annuities.
The company notes that this shift reflects an evolving competitive landscape where insurers seek new growth opportunities while private investors look to deploy capital in long-duration assets.
Moody’s highlights that the use of sidecars – customized risk-transfer vehicles designed to support reinsurance transactions – is another factor driving offshore expansion. Insurers leverage sidecars to scale operations, while investors view them as an opportunity to access insurance risk with potential returns.
These structures, which Moody’s explains as shaped by bespoke business models, allow insurers to manage liabilities while reducing their reliance on traditional capital sources.
Regulatory scrutiny of offshore reinsurance activity continues to grow. Moody’s notes that US state regulators are evaluating measures to improve asset adequacy testing for life and annuity reinsurance transactions.
These regulatory developments aim to ensure that asset-intensive reinsurance deals maintain sufficient financial backing, a move Moody’s considers credit positive for the industry.
While offshore reinsurance provides life insurers with capital flexibility, the associated risks remain a concern. Moody’s warns that less transparent regulatory environments, coupled with potential financial reporting limitations, could create vulnerabilities for insurers relying heavily on offshore entities.
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