The growing use of innovative “funded” or “asset-intensive” reinsurance structures by life insurance companies has attracted regulatory attention, particularly in light of the expanding pension de-risking market.

These transactions, which involve transferring corporate pension scheme liabilities to life insurers, have led to an increase in reinsurance activity where both investment and longevity risks are passed to reinsurers.

In its latest report, Hogan Lovells notes that while regulators recognize the strategic role of reinsurance in managing risk and capital, the rising volume of business ceded to offshore reinsurers, such as those based in Bermuda, has raised concerns.

Regulators are particularly focused on the risks associated with concentrated offshore counterparties, potential correlations in risk due to the credit-focused nature of many reinsurers’ business models, and challenges posed by illiquid assets, especially in scenarios involving the recapture of reinsured liabilities.

Hogan Lovells notes that transparency is another key issue, with regulators lacking direct oversight of these offshore transactions. As a result, various jurisdictions are reviewing whether their current regulatory frameworks are sufficient to address these evolving risks.

In the UK, the Prudential Regulation Authority (PRA) has already issued new guidance for life insurers involved in funded reinsurance arrangements. Meanwhile, in the U.S., the National Association of Insurance Commissioners (NAIC) discussed updated proposals at its August 2024 meeting.

These proposals, put forward by the Life Actuarial Task Force (LATF), would require asset adequacy testing using cash flow methodologies for ceded reinsurance transactions. Hogan Lovells highlights that this move reflects broader regulatory efforts, with the International Association of Insurance Supervisors (IAIS) also monitoring the growth of cross-border reinsurance and preparing to release an Issues Paper in 2025.

In the European Union, regulators have also been addressing the trend. The European Insurance and Occupational Pensions Authority (EIOPA) issued a Supervisory Statement in April 2024 and is expected to provide guidelines on innovative reinsurance techniques by the end of 2024.

Petra Hielkema, EIOPA’s chair, recently noted that one-third of European national supervisors have already encountered asset-intensive reinsurance in their markets. Similarly, the Netherlands is set to implement new regulations for funded reinsurance in 2025, signaling a continued increase in regulatory scrutiny in this area.

In the US, while specific regulations regarding funded reinsurance have not yet been finalized, Hogan Lovells points to developments underway.

In February 2024, the American Academy of Actuaries published an Issue Brief examining the offshore reinsurance market, with a particular focus on Bermuda-based reinsurers. This was subsequently reviewed by the LATF during the NAIC Spring Meeting, leading to the proposal for asset adequacy testing.

The draft Actuarial Guideline is currently being discussed, with key considerations including the scope of its application, frequency of analysis, and whether it should apply retroactively to treaties that became effective as far back as January 2021.

As regulators across the US and Europe continue to assess the risks posed by funded reinsurance arrangements, industry participants should expect closer regulatory scrutiny and be prepared to provide more detailed information on the structure and risk exposures of these transactions.