US life and annuity (L&A) insurers are increasingly turning to reinsurance as a strategic capital and risk management tool, with leverage ratios climbing steadily over the past decade, according to a new report from AM Best.
AM Best explained that this trend has been driven by “the higher interest rate environment fueling annuity growth that is heavily reinsured offshore,” particularly in Bermuda and the Cayman Islands.
These jurisdictions have reportedly gained popularity due to “the stable economic environment and regulatory landscape, as well as political stability, access to legal and financial talent, and flexible accounting regimes.”
According to AM Best, the ability of offshore reinsurers to choose between regulatory reporting frameworks, ranging from US GAAP to IFRS 17, local statutory requirements, or BCAR, has also made these markets attractive.
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This flexibility can result in cedents taking reserve credits that diverge from the reserves held by the reinsurers themselves. AM Best stressed that the increased use of reinsurance persists across both rising and declining yield environments, underscoring its durability as a capital management tool.
However, the report also emphasised the importance of robust enterprise risk management (ERM) frameworks, particularly as carriers grapple with asset-liability mismatches and product risks through different underwriting and interest rate cycles.
AM Best said competition for capital solutions has intensified alongside the “substantial growth in the US annuity market,” with private equity-backed insurers and investment managers increasingly leveraging offshore reinsurance, sidecars, and asset-intensive transactions to boost capital efficiency.
It also flagged activity in longevity swaps and retrocession strategies, noting that “the offshore reinsurance model continues to be profitable,” while warning of concerns tied to rapid growth and evolving regulation.
AM Best stated it is “continuously monitoring concerns over the transparency of capital adequacy, composition of investments, and, most of all, maintaining financial stability while protecting policyholders.”
“AM Best will continue to evaluate the emerging trend in reinsurance,” the agency concluded, “with a much greater focus on how transactions will be structured.”
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