Moodys Report: Offshore Reinsurance Can Complement Onshore Choices
Despite certain risks, offshore reinsurers can offer a complementary alternative to onshore reinsurance, says a report from Moodys Investors Service, New York.
The rating agency cites advantages to offshore reinsurance, primarily the Bermuda and Barbados markets, if used in moderation, with treaties that are appropriately structured and secured, through well-capitalized, well-diversified insurers.
Included among those benefits are lower costs and innovative products, the report continues. 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. Other benefits cited by Moodys include 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 aboard, offshore reinsurance transactions alone would not result in industrywide downgrades.
However, Moodys 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.
The report finds that 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. Of the total $42 billion ceded to unathorized 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., Moodys says.
Reasons for the growth of this market, according to Moodys, include both onshore and offshore regulatory improvements, the success in using this market as demonstrated by the property-casualty industry, the use of U.S. or Canadian GAAP accounting, and demutualizations in the 1990s that made newly public insurers consider reinsuring blocks of business with low return on equity.