Japan’s financial regulator is moving to tighten oversight of life insurers offloading their risks to reinsurers, after a series of multibillion-dollar deals involving Bermudian companies.

The country’s Financial Services Authority has proposed an amendment to its insurance regulations that would beef up scrutiny of contracts and the reinsurers taking on the risk, as well as areas including asset management, collateral, concentration risk and stress testing.

If implemented, the changes would impose increased regulatory friction on an accelerating deal flow from Japan to Bermuda.

Just last month, Japan Post Insurance struck deals with two Bermudian long-term reinsurers, Talcott Re and Aflac Re.

Japanese life insurers have been grappling with a new capital regulatory framework based on the International Capital Standard, as well as low interest rates and increased life expectancy creating a need to generate higher yields on assets.

Regulators’ concerns focus on “asset-intensive reinsurance”, which involves reinsurers taking on long-term liabilities of a block of annuities, for example, and acquiring the associated assets for investment.

Several of Bermuda’s life reinsurance companies are owned by or affiliated with private equity companies, who have invested a portion of these life insurance and pension assets in private credit.

Regulators in the United States, European Union and Britain, as well as Japan, have expressed concerns over the transparency, liquidity and valuation aspects of private credit, and the potential conflict of interests between policyholders and investors.

The International Monetary Fund also flagged up a risk of “contagion” to the broader financial system stemming from asset-intensive reinsurance.

The Bermuda Monetary Authority has responded by strengthening asset disclosure requirements and last year conducted a stress test of long-term reinsurers, using a 2008 global financial crisis scenario model.

Bermuda is the global epicentre of this trend and its burgeoning life reinsurance industry had approximately $1.52 trillion in assets under management, as of September 2025, according to BMA data.

In the proposed amendment to Japan’s Comprehensive Supervisory Guidelines for Insurance Companies, the FSA first states that when life insurers cede risk, they no longer have to hold reserves corresponding to the portion covered by reinsurance.

“Whether this treatment is permissible should be determined comprehensively, not merely based on formal provisions, but by considering whether the reinsurance contract reliably transfers risk into the future and whether there is a high probability of recovering reinsurance claims,” the proposal reads, according to a machine-generated translation of the original Japanese document.

Areas of focus include whether the contract “lacks substantive risk transfer”, whether risk could return to the ceding company under certain conditions, the risk of delayed recovery, and the effectiveness of collateral and asset segregation.

Another key point raised is that “it is necessary to understand the financial condition of the reinsurer”.

The FSA also wants tougher stress testing.

“Insurance companies should construct stress scenarios considering multiple factors such as stock prices, interest rates, foreign exchange, and credit spreads, including correlation breakdowns and liquidity stress,” the proposal explains.

The FSA states that “reinsurance optimises group risk, but increases complexity”, and calls for governance frameworks to be established with key considerations including group risk appetite, strategy alignment, regulatory environments, counterparty risk, and stress resilience.

The regulator is inviting comments on the proposed amendment through May 11.