Moodys Report: Offshore Reinsurance Can Complement Onshore Choices

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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.

Direct writers contacted by National Underwriter say 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 Company, New York.

Guardian has used offshore reinsurance a few times as a very small part of the total reinsurance, Starr continues. For instance, last year it was used for a very small share of one of Guardians products, he continues.

In Guardians case, business was ceded to an onshore company which, in turn, ceded the business to an offshore affiliate, he explains.

Offshore reinsurers, he says, have to be looked at depending on the business they focus on: yearly renewable term, the catastrophe market, financial reinsurance, and M&A and reinsurance.

Regardless of the focus, the concept is the same–regulatory and tax efficiency, Starr says.

Direct writers have certain protections they can look to, namely, letters of credit a reinsurer gets from a financial institution that can be drawn on by the direct writer and contract provisions that usually allow a direct writer to stop reinsuring new business.

The offshore reinsurance market, according to Starr, has the potential to become a “solidly middle tier” part of the business, behind major reinsurers. “It is a viable marketplace that just has too many advantages not to use,” Starr adds.

At Jackson National Life Insurance Company, Lansing, Mich., the focus is on shedding risk and less on whether the reinsurer is onshore or offshore, says Rhonda Grant, a spokesperson.

Jackson National has used eight onshore reinsurers and one offshore reinsurer, she says. But before offshore reinsurance is used, Grant says Jackson National makes sure certain safeguards are in place such as a letter of credit.


Reproduced from National Underwriter Edition, February 17, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.