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How reinsurance can enhance governance and growth for life insurers

Financial institutions and private equity firms with life insurance businesses are increasingly seeing benefits in forming offshore life reinsurance companies.

Financial institutions and private equity firms with life insurance businesses are increasingly seeing benefits in forming offshore life reinsurance companies. Life reinsurers offer financial flexibility and can provide significant capital relief to life insurers. In addition, life reinsurance can enable life insurers to reduce portfolio expenses while improving their return on capital.

These advantages have led to steady growth in offshore long-term reinsurance assets. Two leading domiciles for life reinsurance companies are Bermuda and the Cayman Islands. The Bermuda Monetary Authority (BMA) reported, as of December 2022, 159 licensed long-term commercial life insurance or reinsurance entities. That was a 7.4% increase from 2021. At year-end 2021, Bermuda’s long-term commercial companies held total assets of nearly $1.07 trillion.

The Cayman International Monetary Authority (CIMA) reported 38 licensed international long-term life insurance or reinsurance companies in the fourth quarter of 2023, with total assets of nearly $75 billion.

Benefits of life reinsurance

Reinsurance offers several key benefits to life insurers, including:

Capital optimization. Credit for reinsurance allows insurers to reduce balance sheet liabilities, enabling them to free up and deploy capital for other purposes.
Risk mitigation. Sharing risk with a reinsurer provides funds for paying claims, mitigating financial risk for the ceding insurer.
Governance. Using reinsurance as part of a capital management strategy can be an effective way to demonstrate strong governance and meet regulatory requirements.
Growth opportunities. Reinsurance can strengthen insurers’ balance sheets and facilitate cedents’ investments in new or existing products to achieve growth.

Present and future challenges

Changing economic and regulatory conditions pose challenges for life insurers, influencing not only financial performance, but also decisions about long-term business objectives. Life insurers therefore can benefit from working with experienced partners that can help them navigate these challenges.

Regulatory regimes are changing in jurisdictions such as Bermuda. The BMA, for example, has updated their Economic Capital framework which life insurers use in order to calculate reserve valuations effective March 31, 2024. These changes will prompt life insurers to look closer at their capital management strategies and day-to-day operations.

The interest rate environment also poses challenges and opportunities for life insurers in governance and portfolio management. Small changes in interest rates can alter insurers’ financial projections and require action to comply with applicable regulations. Because regulatory requirements differ across jurisdictions, it is important to have a solid group of service providers to help navigate these issues.

How Marsh can help

Marsh has the expertise to assist clients — whether an existing life insurer or a startup — with regulatory issues, governance, financial reporting, and day-to-day management.

As the world’s leading professional services firm in the areas of risk, strategy, and people, with global capabilities in risk and capital management, Marsh has a deep bench of specialists experienced in life reinsurance. Our teams serve life organizations with a variety of needs, from mapping out and advising clients on effective capital strategies to validating their capital models, ensuring data integrity, and implementing capital optimization strategies. We offer highly customizable services designed to meet clients’ specific needs.

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