Insurers play an important role in promoting policyholder protection, financial security, and macroeconomic resilience, serving both individuals and institutions. Due to this role and the long-term horizon of many insurance contracts, insurers hold large investment portfolios. They are significant players — alongside other financial institutions — in providing long-term funding to the real economy, financial intermediation, and capital accumulation.
The availability and affordability of insurance products is crucial to addressing an estimated global retirement savings gap of about $70 trillion. Reinsurance (insurance for insurers) provides an important mechanism to access additional capacity to write new business, with Bermuda a preferred jurisdiction in part due to its status as a global insurance hub and globally recognized regulatory regime. Bermuda reinsurers now support more than $1 trillion in life insurance reserves.
Our latest report, “Analysis Of Systemic Risk In The Long-Term Insurance Sector,” offers a fact-based assessment of the systemic risk posed by the Bermuda long-term insurance sector in relation to global trends. This includes background information on the role of insurers, the broader market landscape, and key regulatory concerns that have been expressed in relation to the long-term insurance sector.
We have been at the forefront of efforts to identify, assess, and analyze the potential for systemic risk in the insurance and broader financial services sectors since the 2008 Global Financial Crisis (GFC). In this thought-leadership piece, we ask whether the Bermudian long-term (life) insurance industry contributes to global systemic risk.
The rise of Bermuda’s reinsurance sector
The concept of “systemic risk” gained broad traction following the GFC to capture the idea that certain risks could threaten the functioning of the overall financial system, rather than being isolated to individual institutions. Since then, as regulators and other stakeholders have sought to better understand potential sources of systemic risk, there has been convergence around a common set of transmission channels through which systemic risk could propagate through the financial system, and which provide an important tool to understand and assess the potential for systemic risk.
While the expansion of the Bermuda reinsurance sector, including asset-intensive reinsurance, has provided an important source of capital and capacity to global life insurance markets, it has drawn attention from global regulators and observers who have noted two important global trends in the life sector:
- Increased allocations to private credit assets on life insurer balance sheets
- Increased use of asset-intensive reinsurance (AIR), particularly in cross-border transactions to jurisdictions such as Bermuda
These trends have raised questions as to whether the concentration of risk held by Bermuda reinsurers presents a potential systemic risk.
Evaluating systemic risk in Bermuda's long-term insurance sector
To understand the potential for systemic risk arising from the Bermuda long-term insurance sector, we evaluated how systemic risk transmission channels could apply to the sector, undertaking a fact-based and analytical assessment of how it might contribute to systemic risk. Our report constructs three hypothetical (and extreme) scenarios:
Scenario 1: Credit crisis triggering mass reinsurance recapture
The potential impact of a mass recapture of Bermuda AIR following a severe downturn in credit markets is assessed. We conclude that, if a market-wide and intense credit crisis leads to mass recapture of Bermuda AIR, such an event would not threaten the solvency of a material portion of global insurance markets.
Scenario 2: Confidence shock into the Bermudian insurance market, triggering mass lapse and sale of assets
Considering the potential for insurers to experience heightened liquidity demands, this analysis examines whether asset liquidation at Bermudian reinsurers could impair the relevant asset markets. We conclude that reinsurers hold sufficient liquid assets to meet unexpected liquidity demands even in a severe liquidity stress event, and even if material sales were required to address liquidity needs, they would likely be limited to liquid assets.
Scenario 3: Withdrawal of insurer private credit demand
We examine the role of insurers in funding the real economy through the private credit markets. In particular, we consider the chain of events that would lead to insurers pulling back from private credit markets, and whether such a scenario could cause a significant source of disruption to the financial system and real economy. Given the Bermudian long-term sector constitutes a small share of global credit markets, we conclude that a pullback in the role insurers play as a provider of funding is unlikely to disrupt the broader financial system.
Closing reflections — safeguards and risks in Bermuda’s long-term insurance sector
While the Bermuda long-term insurance sector does not meaningfully contribute to global systemic risk, concerns raised by regulators and other participants are understandable. A more in-depth examination of the transmission mechanisms finds that safeguards in place — from regulatory requirements and market practice, and the inherent long-term nature of insurance liabilities — effectively limit the potential consequences of any stress on the broader financial system. However, we identify several recommendations to enhance the ability of regulatory and other stakeholders to analyze and evaluate the potential risks:
Enhancing transparency is key to strengthening risk oversight. More public transparency on AIR structures, transactions, counterparties, and volumes as part of regular reporting. This would improve levels of understanding, in particular in relation to potential concentrations of risk in the system.
Ongoing regulatory oversight and safeguards rather than restriction. We are strong advocates for regulatory oversight — such as enhanced monitoring — and safeguards, including recapture planning and system-wide stress testing, where concerns arise. Rather than explicit or de facto restrictions on AIR, as been observed in some jurisdictions, recognizing the importance of a well-functioning reinsurance market.
Risk-based understanding and monitoring of asset and liability portfolios. It is critical to monitor the potential risks of complex assets both at a firm and system-wide level. But we urge market participants to do so in a risk-based manner, carefully assessing the specific asset and liability profile rather than making broad-brush assertions. In this context, we are wary of regulatory intervention based on broad definitions of “alternative assets.”
We additionally identify the importance of risk management practices that occur at the firm level:
Well-defined counterparty risk framework informed by recapture impacts. Sound counterparty risk management is fundamental to participation in AIR markets. While market practice varies across jurisdictions and firms, we believe good practice counterparty risk management should include firm-defined counterparty limits or incorporation of counterparty risk into existing risk metrics), informed by quantitative analysis of the impact of recapture on cedent balance sheets.
Enhanced counterparty default or recapture planning. Firms should be prepared operationally to understand how they could respond and the actions available in the event of distress or failure of a reinsurance counterparty. For example, firms should have policies and governance in place to support such analysis.
Ultimately, maintaining a resilient and well-regulated insurance sector is crucial to mitigating systemic risk while ensuring market stability.
The production of the report was funded by Bermuda International Long-Term Insurers and Reinsurers (BILTIR), but Oliver Wyman has maintained full editorial rights and responsibility for the analysis and conclusions of the report.
