The Troubling Use of Offshore Reinsurers

When a pension risk transfer deal (PRT) takes place, liabilities for retirees’ pensions are transferred to an insurance company. It follows, then, that an insurer’s investment decisions stand to impact retirees directly.

Insurers are increasingly transferring payment liabilities to offshore reinsurance companies in jurisdictions like Bermuda and the Cayman Islands. This is very troubling for the beneficiaries of insurance policies, including retirees.

Why is the practice of using offshore reinsurance problematic?

Warren S. Hersch, writing for Life Annuity Specialist, describes a few of the reasons. First, there is a lack of transparency as to the details of these reinsurance transactions. This means insurers can transfer obligations to pay future claims without proper oversight. According to forensic accountant, Tom Gober, If the offshore entity is a weak investment, the liquidity of and solvency of the insurer is at risk.

Second, although there exist multijurisdictional examinations for these kinds of transactions, affiliated offshore insurers or reinsurers are often not included in them. According to the National Association of Insurance Commissioners (NAIC), while information in Bermuda’s examinations is shared with regulators, it is not made public. This is, again, a problem for transparency.

The recent increase in private equity-owned insurers is another worry. These insurers tend to use offshore entities to take advantage of more lenient accounting, reserving and capital requirements to free up their capital. However, these lower levels of regulation and oversight in offshore companies may mean increased risk for beneficiaries and retirees.

United States Senator Sherrod Brown, Chairman of the Senate Committee on Banking, Housing and Urban Affairs, is working with the NAIC, and the Federal Insurance Office, to evaluate the increase in risky investment decisions made by private equity-owned insurers.