AM Best flags collateral gap in offshore annuity reinsurance

Bermuda now holds roughly $1.1 trillion in US life and annuity liabilities, and AM Best is warning that the collateral backing that book has not kept pace with its growth. In a new report, the ratings agency said offshore life and annuity reinsurance has grown at an average annual rate of 31% over the past decade, driven by strong retirement-product sales and insurers' demand for capital. Edward Kohlberg, a director at AM Best, put it plainly: "There is increased recoverability risk in some cases due to a lack of collateralisation in some jurisdictions." The agency's broader instruction is for insurers to stress-test the financial resilience of their offshore reinsurers.

That warning lands as the offshore market's size becomes plain: separate Alirt research cited by AM Best puts Bermudian-based reinsurers at $1.1 trillion of the $2.7 trillion in US life and annuity liabilities ceded at the end of 2025 — 40.7% of the total and 85% of liabilities ceded outside the US. AM Best's own data show Bermuda accounting for 39.9% of reserves ceded by American life and annuity insurers in 2025, while the Cayman Islands took 2.3%, up from 2% a year earlier. Cayman has spent years pursuing reciprocal status from the National Association of Insurance Commissioners and recently moved closer; Bermuda already has that status, alongside France, Germany, Ireland, Japan, Switzerland and Britain.

Reciprocity is where the capital rules bite. A ceding insurer taking reserve credit from a reinsurer in a reciprocal jurisdiction faces different, often lower collateral requirements than it would with a non-reciprocal reinsurer, so the recoverability risk does not stay with the reinsurer — it lands on the ceding insurer's balance sheet.

The underlying growth is real. Ceded life and annuity reserves more than doubled between 2018 and 2025 as higher interest rates supported annuity sales, and AM Best expects more insurers to use reinsurance to manage growth and capital. Reinsurance leverage among US life and annuity insurers rose to 346% at the end of 2025 from 258% in 2021, and by then US insurers had taken about $1.61 trillion in reserve credits from reinsurance transactions. Forty-one percent of that total related to funds-withheld arrangements that belonged to reinsurers, up from about 21% in 2016.

That funds-withheld shift is the market's quiet acknowledgment of the recoverability risk: funds-withheld and modified-coinsurance arrangements keep assets with the ceding company, reducing credit exposure to the reinsurer, but they do not eliminate it. The ceding insurer still depends on the reinsurer's promise, and now it also carries the asset risk itself — the structure shifts the risk rather than diversifies it.

The counterparty-credit risk is unfolding in a market with record reinsurance capital, projected at $705 billion per AM Best, which suggests the offshore shift is a capital-management trade, not a capacity response. Permanent capital is flowing into life reinsurance faster than regulators can write rules, and the next dislocation will be in counterparty credit rather than deal volume. AM Best's warning is a ratings-agency articulation of that thesis for the offshore annuity side: the 31% annual growth rate is capital-driven, with reserve credit the prize and collateral the discipline. The insurers that thrive in the next cycle will be the ones that stress-test now, rather than after a recoverability dispute.

Bermuda's own regulator is not asleep. As this publication has reported, the Bermuda Monetary Authority's liquidity test for a new reinsurer — the InEvo Re A- review — asked whether cash can move in a crisis, which is the right question, and AM Best is now asking it across the entire offshore market. The report does not single out Bermuda, but the island's $1.1 trillion position means it is where the risk is concentrated. Cayman's NAIC application is the near-term test: if it succeeds, the collateral requirement for Cayman reinsurers will fall, and the recoverability risk will migrate further up the chain. The sidecar structures that helped Cayman grow are exactly the kind of vehicles that AM Best's stress-test instruction targets.

Capital-rules desks should watch the NAIC's decision on Cayman. Bermuda's reciprocal status is settled, while Cayman's is not. If Cayman gets in, the collateral requirement falls for a growing offshore jurisdiction, and the recoverability risk that AM Best flagged becomes a structural feature, not an exception.