82% decides what Japan's 11% is worth

The Bermuda International Life and Annuity Conference opens Monday with more than 700 delegates expected, and one of the more useful things said about the island's long-term reinsurance sector this month came out of Tokyo: Damian Cooper, a partner at PwC Bermuda back from the East Asia Insurance Conference, put the theme in a press release: continued recognition of the Bermuda reinsurance market as an important partner for the Japanese insurance industry, resting on what he called the market's "capital diversification and deep risk expertise."

The recognition is not new, but the numbers behind it have grown large enough to organize the sector: Bermuda's long-term insurers and reinsurers manage about $1.52 trillion and service roughly 90 million policyholders worldwide, with Japan accounting for 11 per cent of the business ceded to the sector against the United States' 82 and 7 for the rest of the world combined. Nine per cent of those policyholders are Japanese.

Deal flow has tracked the shift. In March, Japan Post Insurance struck agreements with two Bermuda-domiciled reinsurers, Talcott Re adding another ¥100 billion (about $625 million) of payout annuities on top of an earlier ¥550 billion transaction and Aflac Re Bermuda separately reinsuring a block of Japan Post whole-life annuities; Prismic Life Reinsurance International followed in April with a yen-denominated block of whole-life and annuity policies from Daiichi Life Insurance.

Suzanne Williams, Biltir's chief executive, told The Royal Gazette earlier this year that Asian expansion is becoming a major source of future growth for the island, naming Japan, Hong Kong and Singapore, and at February's Refocus conference she called Asian growth the "most talked-about thing" in her conversations. Cooper's remarks land with Bermuda's role in Asian markets already on next week's agenda.

The flow turns on rules more than rates. Last year's conference took note of Japan's introduction of a new capital framework built on international standards, a change that makes Bermuda's fluency in those standards more valuable to insurers working through low interest rates and an ageing population; Bermuda's pitch to Tokyo is that it already speaks the language Japanese regulators are moving toward, and an 11 per cent share of ceded business is what that pitch has produced so far.

The economics that pull Japanese blocks offshore look much like the ones that pull American blocks there: long-duration liabilities handed to a balance sheet that wants them, backed by assets that stay put. Permanence is the product, and it is why the regulatory attention keeps arriving — the NAIC's coming capital charge and AM Best's collateral note both take aim at the same feature, that a book of annuities moved offshore is a book of liabilities nobody expects to bring home. Permanent capital is what the cedents want and what Bermuda sells, and the regulator is now inside that trade.

The published record then runs out, with The Royal Gazette's account ending mid-sentence on Japan's Financial Services Agency wanting something stronger and not saying what. That unfinished thought matters more than anything on the conference schedule, because a regulator tightening the terms of outward cessions and a regulator deepening equivalence with international standards produce very different numbers for Bermuda, and the Japanese insurer — not the reinsurer on the other side of the trade — is the party that has to satisfy it.

Whatever Tokyo decides, the sector's center of gravity stays in the American book. Eighty-two per cent of ceded business means a US rule change re-prices nearly the whole sector while a Japanese one re-prices a tenth of it, which is why the year's most consequential regulatory development for Bermuda's long-term reinsurers came from the National Association of Insurance Commissioners. A memo out of its national meeting instructed the Life Risk-Based Capital Working Group to develop a capital charge for cessions to non-reciprocal jurisdictions, due at the end of 2027. That timetable puts rating and capital committees into the repricing well before the final RBC language is adopted, a sequence this publication has argued will sort offshore reinsurance faster than the rule text itself.

The ratings side has already begun. AM Best's warning that reserve credits in offshore annuity reinsurance are rising faster than the collateral behind them describes the same trade from the liability side of the balance sheet. Bermuda's answer is jurisdictional: its long-term sector sits inside the reciprocal perimeter the NAIC's capital formula is being written toward, which converts recognition earned over a decade into an item on a capital schedule — a firmer asset than any conference panel can confer.

Japan brings a second regulator into the transaction, and that is the difference between the Tokyo channel and the American one. The yen-denominated Prismic block is a bet that Japan's Financial Services Agency keeps treating Bermuda as infrastructure, and the case for that bet is durable because it rests on standards Japan adopted because they are international. The same standards also hand the agency a vocabulary for asking harder questions, and the record of Cooper's remarks does not finish the sentence about what it is asking.

Bermuda's long-term sector has $1.52 trillion and 90 million policyholders to show for its expertise in navigating international standards, and Japan is the market where that expertise earns most, because Japan is the market that just rebuilt its own capital rules on those same standards. The next leg of the Japanese share will be written by the Financial Services Agency, whose next piece of text will matter more to the 11 per cent than anything said over two days in Bermuda.