NU Online News Service, Feb. 13, 12:25 p.m. – Despite certain risks, offshore reinsurers can offer a complementary alternative to onshore reinsurance, a report from Moody’s Investors Service, New York, says.
If used in moderation, with treaties that are appropriately structured and secured through well-capitalized, diversified insurers, the rating agency cites advantages to offshore reinsurance, primarily through Bermuda and Barbados.
Among those benefits are lower costs and innovative products. Lower costs result from lower minimum capital and reserve requirements and the absence of corporate income and capital gains taxes, according to the rating agency. Others benefits cited by Moody’s are diversifying reinsurer credit and business exposures.
The rating agency notes that because most transactions involve intercompany business of financially secure U.S. parents or transactions with U.S.-licensed subsidiaries of highly rated global reinsurers, offshore reinsurance transactions alone would not result in industry-wide downgrades.
However, Moody’s also says that due to less stringent offshore insurance regulation and statutory financial reporting, particularly for capital and reserving, the bankruptcy of an offshore reinsurer could lead to the recapture of hundreds of millions of dollars of business, with potential negative consequences for direct writers.
It also cautions that some offshore start-ups have strained common equity capital because of rapid growth, limiting their ability to generate new business.
U.S.-ceded reinsurance to ‘unauthorized companies,’ companies not licensed in the U.S., grew at a compound annual rate of over 30% between 1997 and 2001 and by 35% between 2000 and 2001, the report finds. Of the total $42 billion ceded to unauthorized reinsurers in 2001, over 65% was assumed by offshore markets such as Bermuda and Barbados, with the remaining 35% ceded to onshore locations in Europe, the United Kingdom, Canada and the U.S., Moody’s says.
Reasons for the growth of this market include both onshore and offshore regulatory improvements, the success in using this market demonstrated by the property-casualty industry, use of U.S. or Canadian GAAP accounting, and demutualizations in the 1990s that made newly public insurers consider reinsuring low ROE blocks of business, according to Moody’s.
Direct writers contacted by National Underwriter say that offshore reinsurance can provide a viable risk-transfer alternative.
Offshore reinsurance, when used to diversify reinsurance, can be valuable for the lower expense structure it offers, says Jeremy Starr, vice president-reinsurance, Guardian Life Insurance Co., New York.