Global life insurance and reinsurance companies continue to look for innovative solutions to the longevity risks in their portfolios – life insurance, annuities and long-term disability programs. Further, pension fund trustees are looking for financially efficient methods of managing the longevity exposure in their pension portfolios. With greater life expectancies in much of the world, fear of pandemics, and financial market challenges, these companies are increasingly interested in forming long-term insurers, particularly in Bermuda, Cayman Islands and Guernsey.
These special purpose long-term insurers are insurance entities licensed offshore that function like captives and offer many of the same advantages, including:
- Capital efficiencies. Statutory reserving requirements can be onerous for life insurers. Reinsuring a portion of these reserves offshore can free up capital for the parent organizations.
- Interest rate risk management. A prolonged low-interest rate environment is contributing to reduced investment returns, adding pressure to balance sheets globally. Reinsuring long-term insurance contracts such as life, annuities and disability can offer more investment flexibility to generate higher returns.
- Management of longevity, mortality, and morbidity risks. Demographic changes and worries about pandemics have heightened risks for primary life insurers, pension plans, and long-term disability and critical illness carriers. Offshore reinsurance can help provide capital support and risk mitigation strategies.
- Access to a growing reinsurance market. The international reinsurance market has identified longevity risk as an opportunity to diversify their portfolio and uncorrelated risk, generating opportunity to create financial efficiency for pension fund trustees.
Bermuda, Cayman Islands, and Guernsey are seeing growth in this type of offshore company. For example, in 2018 Bermuda experienced its greatest year-over-year growth in new long-term insurer formations. Bermuda achieved equivalency with Solvency II in 2016 and with the National Association of Insurance Commissioners in 2015. Regulatory equivalency has created a new market option for European and U.S. insurers. These domiciles allow more flexibility in investment assets than regulatory authorities elsewhere. Guernsey has seen a number of high-profile pension funds setting up cells in incorporated cell company structures to manage the longevity risk due to the expertise that exists in the local market.