US insurance regulators are working towards implementing tighter capital standards that would apply to life insurance business ceded to reinsurers in the Cayman Islands.

The move, which applies to all jurisdictions not deemed to have regulatory equivalence with the US, was directed by a key committee of US standard-setting body the National Association of Insurance Commissioners and is intended to take effect by the end of 2027.

Cayman has emerged as a rapidly growing challenger to Bermuda’s dominance in the offshore life reinsurance market. By the end of 2025, Cayman’s life and annuities sector held about $101 billion in total assets, up from $23 billion in 2020.

Bermuda remains the sector leader — total assets across its long-term insurance sector exceed $1.5 trillion.

The industry in both jurisdictions is fuelled by demand from life insurers to offload some of their long-term risks to reinsurers as they meet surging demand for annuities from an ageing population.

Thomas Leonardi, a former Insurance Commissioner for the US state of Connecticut, who has raised concerns that less stringent regulatory standards for life reinsurers in Cayman mean greater risks for insurers, and by extension policyholders, welcomed the NAIC’s actions.

“I applaud the NAIC’s direction to make changes to its Risk-Based Capital formula that will help ensure capital requirements appropriately reflect differences in reinsurance risk,” Mr Leonardi told The Royal Gazette.

“In directing the Life Risk-Based Capital (E) Working Group to develop a reinsurance recapture RBC factor for reserves ceded outside of reciprocal jurisdictions, the NAIC is recognising an important distinction: jurisdictions like Bermuda have earned reciprocal status by demonstrating regulatory equivalence, while jurisdictions like the Cayman Islands are still on that journey.

“As someone who has spoken about the need to distinguish among offshore regulatory frameworks, I am pleased to see the NAIC taking this step.

“Not all reinsurance jurisdictions present the same level of regulatory risk, and capital requirements should reflect the difference between jurisdictions that have achieved recognised standards of supervision and transparency, such as Bermuda, and those, such as the Cayman Islands, that have not yet done so.”

Bermuda has regulatory recognition from the US through its qualified jurisdiction and reciprocal jurisdiction status from the NAIC, and also maintains third-country equivalence with the European Union’s Solvency II regulatory framework.

Cayman is pursuing qualified jurisdiction status. The notes from the NAIC’s Financial Condition (E) Committee meeting last month signal that regulators are keeping a close eye on the growth of offshore life reinsurance and regulatory differences between jurisdictions.

Details of the direction are outlined in a memo from Nathan Houdek, chairman of the NAIC’s Financial Condition (E) Committee, addressed to Ben Slutsker, chairman of the Life Risk-Based Capital (E) Working Group.

Mr Houdek starts the memo by recognising the progress that the Bermuda Monetary Authority, the island’s financial-services regulator.

Bermuda had made “meaningful enhancements to its regulatory system in recent years”, Mr Houdek said.

“Overall, many of the regulatory changes adopted by the Bermuda Monetary Authority have been viewed positively by US regulators, and states with experience collaborating with the BMA generally report a favourable view of Bermuda as a reciprocal jurisdiction,” Mr Houdek added.

In life and annuity reinsurance, market risks were transferred to the reinsurer and replaced by credit risk, Mr Houdek explained. “As a result, the cedant’s primary concern becomes the reinsurer’s ability to meet its obligations and the possibility that the ceded business may need to be recaptured.”

Mr Houdek did not name Cayman. He cited research by an NAIC working group, which found “business ceded to unauthorised reinsurers generally comes from newer, relatively small annuity writers offering aggressive crediting rates”.

He added: “These transactions also tend to produce larger reductions in total asset requirements than comparable business ceded to Bermuda.”

As a result, life insurers who offload their risks to reinsurers “may face greater capital strain if the business must be recaptured or if the reinsurer experiences solvency issues”, Mr Houdek added.

“Many state insurance regulators believe this risk warrants immediate attention given the increase in the continued growth in offshore reinsurance transactions.”

The committee recommended two changes to the life RBC formula:

• A reinsurance recapture RBC factor to be applied to ceded reserves and modified coinsurance balances for all reinsurance located outside of reciprocal jurisdictions while of course considering an overcollateralising of the reserves in establishing the required RBC. The factor would account for the additional capital that would be required if a ceding company had to recapture those reserves.

• To account for increased credit risk for reinsurers that have lower financial strength ratings, modify the reinsurance methodology used in the life RBC formula for recoverability risk by aligning with the approach used in the property/casualty RBC formula.

The memo ends: “The Committee directs that these efforts be prioritised so that the changes are in place for year-end 2027.”

Executives from Athene, a life reinsurer with operations in Bermuda, have been vocal in their concerns about Cayman’s regulatory standards in their industry, warning of “contagion risk” and “jurisdictional arbitrage”.

Mr Leonardi is an independent director on the board of Athene Co-Invest Reinsurance Affiliate Ltd, a subsidiary of Athene.

In an op-ed last month, published by industry news website Insurance NewsNet, Mr Leonardi wrote: “Some states have begun to allow US companies to emulate Cayman’s permissive approach to capital and reserving in order to cater to domestic insurers. Left unchecked, that trend invites a regulatory race to the bottom, and US policyholders are the ones who would pay for it.”

Faramarz Romer, the chairman of the Cayman International Reinsurance Companies Association (CIRCA), told The Royal Gazette: “Circa is aware of the NAIC Financial Condition (E) Committee’s directive to the Life RBC Working Group and will be closely monitoring the developments at the upcoming NAIC meetings.

“Circa continues to support the Cayman Islands’ QJS initiative and to continue aligning its standards and regulations with those of the NAIC.”