Annuity Issuers Send More Business to the Cayman Islands

U.S. life insurance and annuity issuers are using reinsurance arrangements based in the Cayman Islands to back a growing share of their business, according to a team of analysts at Moody’s Ratings.

The Cayman Islands and its insurers maintain that the self-governing British territory has a thorough, modern regulatory system. But the Moody’s team contends that the Cayman Islands system is still too different and operations there are still too opaque for it to treat reinsurance written there as being equivalent to U.S. reinsurance.

“The overall movement of business offshore is a net credit negative for the life insurance sector,” the analysts warn.

“In the case of the Cayman Islands, the regime is less internationally recognized and transparent than those in jurisdictions such as the U.S., Europe and Bermuda,” the analysts add. “While certain reinsurers in the Cayman Islands may be well-run and capitalized, this is challenging for outside parties to determine.”

Cayman Islands regulators are working to get official recognition from U.S. and European regulators as an equivalent source of oversight, and recognition of equivalence would make Moody’s more comfortable with life and annuity reinsurance written there, the analysts say.

What it means: You might be wondering what to make of all of the announcements about U.S. annuity issuers reinsuring your clients’ annuities through firms based in the Caribbean. Rating analysts are wondering, too.

Moody’s analysts’ views can affect an insurer’s ability to borrow money, how much it pays to borrow money, and how much it can charge for its life insurance policies and annuity contracts.

Reinsurance: Reinsurance is insurance for insurance companies.

U.S. life insurers can use reinsurance to protect themselves against the risk of higher-than-expected life insurance death claims or annuity benefits obligation bills.

Insurers can also use reinsurance to reduce the amount of capital they must set aside when writing new business and to change the tax rules or other parameters associated with the business.

In the United States, for example, capital counting rules strongly discourage insurers from using common stock and some other types of assets in their investment portfolios. In other jurisdictions, regulators may take a different approach to regulating insurers’ investments.