Bermuda and Cayman Reinsurance Markets See Growth with Sidecars and New Lines – KPMG
Regulatory Changes and Investor-Driven Capacity Boost Offshore Reinsurance Expansion
The offshore reinsurance markets in Bermuda and the Cayman Islands are witnessing significant growth, fueled by the increasing use of sidecar models and expansion into new lines of business.
Growth Driven by Sidecars and New Opportunities
Sidecars have become an increasingly popular tool, allowing reinsurers to attract third-party capital to support a broader range of risks. This model provides additional capacity and diversification while offering investors direct exposure to the reinsurance market. As sidecars gain traction, these markets are benefiting from the enhanced financial flexibility and investment potential they bring.
Regulatory Shifts Shape the Landscape
In parallel with these market developments, regulatory changes are reshaping the offshore reinsurance landscape. KPMG highlights that Bermuda has enhanced its regulatory framework, introducing stricter reporting and governance requirements under a risk-sensitive capital regime. These changes are designed to further strengthen the jurisdiction’s attractiveness for reinsurers.
Meanwhile, the Cayman Islands is working to qualify under the National Association of Insurance Commissioners (NAIC) framework to attract more US-based reinsurance business. This qualification could offer reinsurers a more flexible regulatory environment for affiliated transactions, though they will still need to adhere to state-level regulations and their own reporting obligations.
KPMG emphasized that these regulatory shifts require alignment between stakeholders to ensure compliance while achieving their business goals.
The Rise of Asset-Intensive Life Reinsurance
Another key trend shaping the reinsurance market is the growth of asset-intensive life reinsurance. These transactions involve transferring long-term life and annuity liabilities, along with their associated assets, from ceding insurers to reinsurers. The structure allows ceding insurers to free up capital while providing reinsurers with stable income streams and investment opportunities.
Recently, reinsurers have shifted from a liability-driven to an asset-driven approach. Traditionally, reinsurers would assume liabilities and then build a matching asset portfolio. However, today’s reinsurers are starting with higher-yielding assets like private credit and then seeking liabilities that align with those investments.
This shift has been driven by prolonged low interest rates, which have made generating returns from traditional fixed-income assets more challenging. While this approach may boost profitability, it also introduces new risks related to asset valuation and risk management.
KPMG advises reinsurers to implement strong governance and valuation processes to manage these risks effectively.
Interest Rates and Their Impact on Reinsurance
The broader economic climate, especially changes in interest rates, is affecting the reinsurance deal environment. Rising interest rates could improve returns on asset-intensive life reinsurance transactions but also create challenges, such as increasing policy lapses and surrenders as policyholders move toward higher-yielding opportunities.
This shift can impact transaction profitability, requiring reinsurers to adjust pricing and risk management strategies. KPMG highlights the need for reinsurers to refine their valuation models to capture potential risks and maintain discipline in underwriting and pricing practices.
Macroeconomic Risks and Cautious Deal Activity
Macroeconomic risks, including inflation and geopolitical uncertainty, are contributing to a more cautious approach among reinsurers. Some firms have reduced deal activity or shifted focus to smaller, more targeted transactions. In this environment, reinsurers must maintain a clear risk appetite while nurturing strong relationships with cedants and counterparties to identify viable opportunities.
Data Privacy and Security in Cross-Border Transactions
As the reinsurance industry becomes increasingly data-driven, concerns over data privacy and security are growing. Specifically, personally identifiable information (PII) must be handled carefully in cross-border reinsurance transactions. Different jurisdictions regulate PII in varying ways, making compliance complex in multi-jurisdictional deals.
KPMG advises reinsurers to minimize the handling of PII and implement strict security controls to manage sensitive data. Compliance teams must ensure adherence to international data protection laws, which may include access restrictions, employee training, and breach response protocols.
As the industry continues to evolve, reinsurers who adapt to these regulatory and security challenges will be better positioned to capitalize on future opportunities.
