Why Bermuda Is Life Insurance Heaven

What You Need to Know

Maryellen Coggins is the new 2021-2022 academy president.
Index-linked variable annuities really are different from other variable annuities.
Some Medicare solvency watchers think changing Medicare supplement insurance rules could improve program solvency.

Members of the American Academy of Actuaries met online last week and revealed answers to some of the most pressing questions in the life, health and annuity sectors — including, for example, why U.S. life insurers all seem to be rushing to do business in Bermuda.

One speaker answered that question with a table in a presentation slide deck: Bermuda is gentler when it’s deciding how much a life insurer’s investments are really worth.

When a life insurer is feeding investments into U.S. risk-based capital ratio calculations, it has to reflect regulators’ ideas about risk by cutting the value of private equity investments, infrastructure stocks and some other types of investments by 47.4%.

When a life insurer is making similar types of capital calculations for Bermuda regulators, the capital charge for private equity investments is just 35.6%, and the charge for infrastructure stocks is just 19.8%.

The rules mean that, in a good year, a life insurer that looks like a Clark Kent investor in the United States will look like a Superman investor in Bermuda. It can afford to cut costs for the customers, pass more profits on to the owners, or both.

Life Insurers’ Investment Rules

Issuers of life insurance, annuities, long-term disability insurance and other long-duration policies depend much more heavily on investment earnings than issuers of major medical insurance and most property and casualty products to generate some of the revenue needed to pay claims.

U.S. regulators’ rules encourage life insurers to invest most of their money in high-rated corporate bonds, mortgages and mortgage-backed securities.

Bermuda’s capital rules mean it’s easier for life insurers based there to try to increase returns by investing in assets, such as public company stock and private equity funds, that may expose the holder to more risk but also offer higher investment returns.

The American Academy of Actuaries

Actuaries are people who have taken tests to show they understand the math needed to manage insurance companies, pension funds and similar types of arrangements.

The American Academy of Actuaries is a professional group for actuaries that was founded in 1965. The academy works to show federal, state and local policymakers how actuaries are thinking about major public policy questions.

Academy teams look at issues as varied as the effects of COVID-19, what climate change might do to P&C insurance risk, and how changes in the human life span might affect Social Security, Medicare and pension plans.

The Academy’s Annual Meeting and Public Policy Forum

Here are five questions academy members addressed in the public policy forum sessions accompanying their annual meeting, beyond Bermuda capital valuation rules.

1. Who’s in charge of the academy now?

Maryellen Coggins of Boston succeeded Thomas Campbell as the group’s president.

Coggins, who is the 2021-2022 president, is a managing director for risk and capital management services at PwC.

The new president-elect is Kenneth Kent, a consulting actuary with Cheiron.

2. Is a registered index-linked annuity (RILA), or index-linked variable annuity (ILVA), really any different from a traditional variable annuity?

Dodie Kent, Laura Hanson, Pete Weber and Ryan Berends answered that question in a slidedeck for a session on the products known as RILAs, or as ILVAs, or as buffered annuities, structured annuities or hybrid annuities.

The speakers said a RILA contract is much different from a traditional variable annuity, from an insurer’s perspective, because the RILA contract is “non-unitized,” meaning that the customer has no direct claim on the underlying assets. The holder of a traditional variable annuity typically has a claim on the underlying assets in the sub-account.

The investments are also different. An insurer invests a traditional variable annuity customer’s money directly in sub-account securities.

3. Will life and annuity issuers keep announcing one big deal after another?

Laura Bazer took up that question in a look at private equity firms’ use of reinsurance arrangements and other vehicles to acquire blocks of life and annuity business.

Her answer: Sure.

Life insurers still have many blocks they want to sell, and private equity firms still have plenty of capital they want to use.

Looming changes in accounting rules are adding to the deal-making pressure, Bazer said.

Melanie Dunn, a principal in the Seattle office of Oliver Wyman, said another reason for the deals is that the private equity firm buyers may be in a better position to help the acquired insurers invest in higher-yielding alternatives to high-grade corporate bonds.

4. Is the COVID-19 pandemic over?

Maybe, but maybe not.

Daniel Reddy, a pension actuary with Club Vita, said he’s contemplating four possibilities, ranging from a scenario in which the pandemic is nearly over and will lead to long-term improvements in public health efforts, to a scenario in which COVID-19 mutations beat the COVID-19 vaccines and waves of excess deaths roll over the world throughout the 2020s, repeatedly disrupting the health care system for all.

For a single-employer corporate pension plan, for example, those scenarios could lead to anything from a 1% increase in pension obligations liabilities, due to longer participant life spans, to a 5% decrease in pension liabilities, due to shorter participant life spans.

5. Does Medicare supplement insurance really have anything to do with the solvency of the Medicare Part A hospitalization trust fund?

Medicare supplement insurance, or Medigap insurance, helps the purchasers pay the complicated deductibles, coinsurance amounts and copayments required by the traditional Medicare Part A hospitalization and Medicare Part B physician and outpatient services programs.

The Medicare Part B program uses premium revenue to fund its operations as it goes along.

The Medicare Part A program is supposed to invest enrollees’ premiums in a trust fund and use the money in the trust fund to pay part of the cost of the program.

The Medicare Part A trust fund now appears to be on track to empty out in 2026, according to Gretchen Jacobson, a vice president for Medicare at The Commonwealth Fund, a health policy research organization.

Jacobson noted that one of many possible responses to the Medicare Part A solvency issue is changes in the Medigap program.

Many health policy specialists believe that the current version of Medigap, which can pay all but $203 of Medicare Part A and Medicare Part B patient “cost sharing” amounts, encourages patients to spend too much money on expensive, low-value care.

Some policy analysts have predicted that the Medicare Part A trust fund could save as much as $72 billion over 10 years if Congress prohibited Medigap policies from paying any of the first $750 of an enrollee’s cost sharing and then limited coverage to 50% of the next $6,750 of cost sharing.