I’m not sure I even knew Bermuda was an archipelago in the North Atlantic Ocean, only that there was this weird, vaguely triangular-shaped area of the world where planes, boats, their passengers and cargo would vanish without trace. 

Happily, as my family holidays were spent in Southend-on-Sea, there was no risk of me vanishing into the legendary three-sided stretch of saltwater bounded by Bermuda, Florida, and Puerto Rico. 

Subtropical transfer triangle 

Oddly enough, now that I’m working with global insurance clients - including those domiciled in the British Overseas Territory - a different kind of Bermuda triangle is often in my mind. 

The three corners of this newer triangle relate to transfers of pension liabilities to insurers, which are then reinsured in Bermuda.

Unlike the fabled three-cornered section of North Atlantic Ocean, there’s no risk of things disappearing without trace in the Bermuda reinsurance triangle. Although I sometimes wonder if the UK’s Prudential Regulation Authority (PRA) has concerns that this could happen to pension savings.

A world reinsurance destination

Bermuda is the world’s reinsurance marketplace. Other markets have sprung up, and yet more will develop over the next few years, but Bermuda has a dominant position built up since the 1970s that isn’t likely to vanish any time soon.

The reinsurers active in the territory have proven to be adaptable, creative and resilient, continually identifying areas where reinsurance can oil the machinery of insurance around the world.

A rising tide of pension risk transfers

The reinsurance of long-dated pension risk transfer (PRT) liabilities is an area where innovation has been most acutely focused. Beginning in the US and Canada, Bermuda’s reinsurers have enabled capacity to be created that allows greater levels of pension liabilities to transfer over to insurance companies. 

In the wake of an established market in North America came the UK, whose own pension risk transfer market has grown year after year, with £50 billion of defined benefits pension scheme liabilities transferred over to UK PRT underwriters in 20241.

We call them bulk purchase annuities (BPA) here in the UK, but the ethos and net effect is the same, even if the name is different – pension liabilities moving from the pension scheme sponsor to one of an increasing number of UK insurers.

Focusing on the long haul with funded reinsurance portfolios

The structure of these reinsurance contracts is itself different from how a reinsurer would insure a portfolio of catastrophe risks, for example.

The contract involves assets being pledged as collateral, usually held in a ringfenced structure by the reinsurer on behalf of the ceding insurer. That brings into scope the need for a long-duration focus, and a greater use of asset-liability management precision.

These contracts are called ‘funded reinsurance’ contracts, or ‘asset-intensive’ contracts. The asset portfolios will typically comprise long-dated, private credit assets, alongside longer-dated public bonds.

Bermuda’s edge

Since Bermuda is the world’s reinsurance marketplace, global insurance supervisors monitor the Bermuda Monetary Authority (BMA) and its regulatory framework closely. This scrutiny, coupled with Bermuda’s natural desire to retain its pre-eminent reinsurance status, obligates the territory to present a rulebook that satisfies critical, watching eyes and allows it to retain its reinsurance dominance.

Herein lies Bermuda’s edge – regulatory evolution. The way the BMA has adapted its rules to ensure the reinsurers it oversees can work with UK PRT underwriters is a perfect example of this flexibility.

Watertight rules

Through Solvency UK, the PRA has established a watertight rulebook for managing annuity liabilities and mitigating against insolvency events that might lead to pensioners losing their accumulated pension pots. 

The PRA’s matching adjustment (MA) framework has created additional flexibility where the insurer can demonstrate a precise match between its liabilities and the assets it puts to work against them. So robust and well-regarded is the MA framework that we’re seeing adoption of similar rules by a number of Asian insurance supervisors.

A ship-shape framework

The BMA has its own equivalent framework to MA, called the Scenario Based Approach (SBA), which has a wider application for Bermuda reinsurers than for just long-dated annuity liabilities. The SBA, and its continued enhancement in recent years has been driven (in part) by attempts to satisfy the PRA, which has been consistently cautious on the role that Bermuda reinsurers can play in the UK’s PRT market.

It doesn’t really matter if you genuinely believe those concerns have foundation – the very fact that the PRA raised concerns meant that the BMA had to respond.

The upshot is a framework that neatly aligns with MA, and, in many instances, goes some way further. My colleague Olivia Evans in our Insurance Solutions team has put this handy comparison table together to show the key differences between MA and SBA.

Solvency UK Matching Adjustment & Bermuda Scenario-Based Approach

A key concern of the PRA has been that Bermuda reinsurers, some of whom are private equity-owned, will have weak risk standards and a greater likelihood of failure as a result.

The BMA’s intervention with, and ultimate dissolution of private investment-owned Class E insurer 777 Re in 2024 won’t have helped soften the PRA’s view in the slightest. The fact that 777 Re weren’t active with UK PRT underwriters is irrelevant – the 777 Re problems validated the PRA’s concerns of risk management weakness.

The 777 Re story led the PRA to focus on the concept of ‘recapture.’ In other words, how UK insurers take back the assets used as collateral within reinsurance contracts. In particular, how will these UK insurers ensure they don’t breach their MA authorisations, or end up with assets that need to be sold quickly, potentially impacting pensioners? 

And so, what you see is a general raising of the bar of regulatory expectation. The BMA has tightened the rules in the SBA and the depth of reporting on private credit assets, and the PRA has increased the obligations of UK PRT insurers making use of asset-intensive reinsurance with Bermuda firms. 

Recent PRA points of interest

The PRA’s Supervisory Statement SS5/24 from last year covers the PRA’s expectations in the following areas: 

With these expectations come additional stress tests and reporting to the PRA.

Choose a seasoned navigator

What does all this mean when it comes to choosing an insurance asset manager for PRT liabilities?

Well, you might want to look for a well-seasoned manager with long insurance asset management experience, like Aberdeen Investments.

We have a long track record of running UK PRT credit portfolios under the MA framework, going right back to the implementation of Solvency II in 2016. We optimise portfolios using proprietary asset and liability management (ALM) techniques and have an established pedigree in sourcing long-dated private credit assets specifically for MA portfolios.

All of that, coupled with the PRA’s focus on recapturing assets from a BMA-regulated insurer to a PRA-regulated MA portfolio, has allowed us to create targeted, optimised portfolios for Bermuda reinsurers that align perfectly with Solvency II MA requirements.

Your next port of call?

To talk about how Aberdeen Investments could help you with insurance asset management, feel free to get in touch. Find out why we believe we’re well-qualified to guide you through the Bermuda reinsurance triangle.