Actuarial Notes

Collateral Structures in the Bermuda Long-term Insurance Market

By Bermuda Monetary Authority · 2024 · CP341-117-25

Study guide: Exam CP-341

A Bermuda Monetary Authority paper dated 6 September 2024 on how asset-intensive long-term reinsurance is executed in Bermuda and how the collateral structures used in the market affect the net risk exposure cedents have to Bermuda reinsurers, in the context of the size of the Bermuda market as measured by assets. The Authority reports that it has experienced collateral structures as an effective and significant safeguard in both normal and adverse conditions, but not a foolproof one.

On the syllabus

Introduction

  • Bermuda Long-term Market Collateral Structures
    • As of 2023 year-end, Bermuda's long-term insurance market assets totalled $1.2 trillion.
    • Most of the long-term reinsurance business in Bermuda (80%) is conducted on a collateralised basis through structures such as Funds Withheld (FWH), Modified Coinsurance (ModCo) or another type of collateral account, such as collateral trusts.
  • Example – with collateral versus no-collateral structures
  • Value of Contractual Mitigations in Collateral Structures
    • The paper lists ten examples of contractual mitigations the BMA has seen in the supervision of the long-term sector, from agreed investment guidelines, limits, substitution rights and valuation approaches to over-collateralisation, recapture provisions, covenants and governing law.
  • What exactly is the Bermuda reinsurer providing if assets remain "held" in the ceding jurisdiction?
  • How has reinsurance benefitted the cedent in this case?
  • What has reinsurance achieved then in this case? What is the benefit to policyholders and the insurance ecosystem?
  • How does reinsurance market participant experience combined with depth of market create resilience?
  • What risk has reinsurance introduced in this case?
  • Are long-term reinsurance collateral structures foolproof?

Conclusion

Sources