The offshore reinsurance markets in Bermuda and the Cayman Islands are seeing growth, driven by increasing use of sidecar models and expansion into new lines of business.
Sidecars, which allow reinsurers to bring in third-party capital to support a broader range of risks, have gained popularity as they provide additional capacity and diversification while offering investors direct exposure to the reinsurance market.
These developments are taking place alongside regulatory changes affecting offshore jurisdictions. KPMG noted that Bermuda has implemented enhancements to its regulatory framework, introducing more stringent reporting and governance requirements under a risk-sensitive capital regime.
Meanwhile, the Cayman Islands is seeking to qualify under the National Association of Insurance Commissioners (NAIC) framework to attract more US-based reinsurance business.
The NAIC qualification could offer reinsurers a more flexible regulatory environment for affiliated transactions. However, reinsurers would still need to comply with cedants’ state-level regulations, along with their own reporting obligations.
KPMG emphasized that these regulatory shifts require careful alignment among stakeholders to ensure transactions meet compliance standards while achieving their intended objectives.
Another key trend shaping the reinsurance market is the growth of asset-intensive life reinsurance. These transactions involve transferring long-term life and annuity liabilities – along with their associated assets – from ceding insurers to reinsurers.
The structure allows ceding insurers to free up capital while providing reinsurers with stable income streams and investment opportunities.
KPMG observed a shift in how these transactions are structured, moving from a liability-driven to an asset-driven approach. Traditionally, reinsurers would assume a portfolio of liabilities and then build an asset mix to match those obligations.
More recently, reinsurers have started by acquiring portfolios of higher-yielding assets, such as private credit, and then seeking liabilities that align with those investments.
The shift has been influenced by prolonged low interest rates, which made generating returns from traditional fixed-income assets more difficult. KPMG noted that while this strategy may enhance profitability, it introduces new risks related to asset valuation and risk management.
Reinsurers must implement strong governance and valuation processes to ensure accurate financial assessments and effective risk controls.
The reinsurance deal environment has been affected by recent changes in interest rates and broader economic uncertainty. Rising interest rates can improve returns on asset-intensive life reinsurance transactions, but they also create challenges.
Higher rates may lead to increased policy lapses and surrenders, as policyholders move to higher-yielding investment opportunities. This can affect transaction profitability, requiring reinsurers to adjust pricing and risk management strategies.
KPMG highlighted that valuation remains a key challenge in reinsurance deals. As transactions move from initial modeling to final valuation, unexpected factors often emerge. Firms must refine their valuation models to capture potential risks and maintain disciplined underwriting and pricing practices.
Macroeconomic risks, including inflation and geopolitical uncertainty, have also contributed to a more cautious approach among reinsurers. KPMG noted that some firms have slowed deal activity or shifted toward smaller, more targeted transactions.
In this environment, reinsurers must maintain a clear risk appetite while strengthening relationships with cedants and counterparties to source viable transactions.
Data privacy and security have become critical concerns in cross-border reinsurance transactions, particularly regarding personally identifiable information (PII). Different jurisdictions define and regulate PII in varying ways, making compliance complex – especially in multi-jurisdictional deals.
KPMG emphasized that reinsurers should seek to limit their handling of PII whenever possible and implement strict security controls to manage sensitive data. Compliance teams play a key role in ensuring adherence to international data protection laws, which may include access restrictions, employee training programs, and response protocols for potential breaches.
As the global reinsurance industry becomes more data-driven, the ability to navigate regulatory requirements while maintaining robust data security will be critical to managing risk and maintaining market trust. KPMG noted that reinsurers that adapt effectively to these challenges will be better positioned to capitalize on future opportunities.
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