I have been sent  this article. I would be interested in thoughts from readers, it disturbs me (published as received).

Bermudian life reinsurance stress test reveals recapture and recovery worries

The vast majority of Bermuda’s life reinsurers have survived a re-run of the 2008 global financial crisis, in a stress test conducted by the Bermuda Monetary Authority (BMA).

However, the regulator’s test revealed 11 of the 106 participants fell below 100% of their Enhanced Capital Requirement (ECR) coverage ratio, and three of these firms had lacked credible management actions to form an appropriate recovery plan. The BMA also identified three firms without a credible plan to prevent an opportunistic recapture of their reinsurance treaties.

The firms involved were not identified.

The regulator had ordered insurers to replicate the severe economic conditions experienced during the crisis on their 2023 balance sheets. This included interest rate shocks, credit spread widening, equity market decline, real estate devaluation and credit default events. In a report on the exercise, the BMA said the aim was to evaluate the

“ability to withstand severe market shocks, assess recapture risk for reinsurers, and identify risk concentrations or other potential vulnerabilities worthy of further attention”.

As a whole, the sector maintained an ECR ratio of 347% post-stress, compared to a baseline of 424%. Some 75 entities maintained coverage above 150%, but 11 fell below 100%.

The BMA emphasised the ECR itself represented a significant stress and entities with less than 100% coverage

“would only have insufficient assets to back their technical provisions following this double stress”.

 The stress test also evaluated the potential for deterioration in reinsurers’ financial strength to levels that would trigger the ceding companies to have the ability to exercise their rights to recapture the risk transfer.

“Of the 106 submissions, the analysis identified three companies with reinsurance contract triggers or options that would potentially be breached under a stress scenario and which didn’t identify sufficient management actions deemed credible to prevent a recapture,”

the BMA said.

“These treaties primarily involve insolvency or ECR-based triggers in the 100-120% range, which highlights the importance of maintaining capital buffers above the minimum regulatory requirements.

“Of these three companies, one wrote only affiliated business and their recovery plan was an orderly recapture. As part of ongoing supervision of the market, the Authority will be discussing the recovery plans with the remaining two companies, who represent about 2% of the total Bermuda long-term reinsurance reserves,”

the BMA noted.

Footnote

Those of us concerned about the destination of pension schemes built up over many decades, will know that the parent of many of what were UK Life Companies is now Bermudian. We will remember that the funding for these Bermudian Life Reinsurance Companies typically originates from the USA.

Details of this risk transfer to Bermuda are detailed here.