Cayman reinsurers ask NAIC to rethink jurisdiction-based recapture charge

Cayman's reinsurance industry has asked US regulators to reconsider a proposed capital charge on reinsurance recapture and counterparty risk, arguing in two letters that the measure would penalise a domicile instead of measuring the exposure an individual reinsurer carries.

The Cayman International Reinsurance Companies Association, which signs its correspondence as Circa, sent the letters to the heads of the National Association of Insurance Commissioners' Life RBC (E) Working Group and its Financial Condition (E) Committee. The proposal carries an implementation target of the end of 2027 and is scoped to jurisdictions the NAIC does not consider to have regulatory equivalence with US standards, a group in which Cayman sits while Bermuda, the offshore market Cayman has spent five years chasing, holds reciprocal jurisdiction status; Cayman has applied for the same.

The balance-sheet case for the letters is straightforward: Cayman's life and annuities sector held about $101 billion in total assets at the end of 2025, against $23 billion in 2020, a fourfold build in five years that has made Cayman a challenger to Bermuda's dominance in offshore life reinsurance, though Bermuda remains far ahead with more than $1.5 trillion in long-term insurance assets.

Circa supports regulatory scrutiny, the letters say; its objection is to the order of events and the instrument chosen. In the association's reading, the NAIC settled on a capital remedy before establishing that one was needed, then aimed it at a jurisdiction-level classification rather than at the firms holding the risk.

One of the two letters states that reciprocal and qualified jurisdiction status indicates the NAIC has evaluated a jurisdiction's reinsurance supervisory system, but that is not the same as considering an individual reinsurer's risk. It adds that recent experience involving a reinsurer in a reciprocal jurisdiction is clear evidence that jurisdiction status alone is not an adequate proxy for recapture risk, and that a rational reinsurance market needs a level playing field; the letters do not identify that reinsurer.

Faramarz Romer, Circa's chairman, argued that jurisdictional status cannot serve as a proxy for the likelihood of recapture, because recapture risk exists across all reinsurers in varying degrees and a charge that does not reflect that variation is not risk-based. If a factor is eventually developed, he said, it should capitalise demonstrated residual risk and reflect the assuming reinsurer's financial strength, capitalisation and ability to meet its obligations, rather than the jurisdiction in which the reinsurer is domiciled.

Two further arguments run through the letters: targeting only jurisdictions without equivalence would have an anti-competitive effect, tilting the market toward the domiciles that already cleared the NAIC's bar, and the association turns the concentration logic back on the proposal by writing that concentrating reinsurance capacity in a small number of jurisdictions "creates its own exposure to jurisdiction-specific disruption."

In the second letter, to the Financial Condition (E) Committee, Circa questioned the process for choosing additional capital as a solution before public analysis showed a need for it.

The distinction matters because the two tests answer different questions. Equivalence is a binary the NAIC can administer without collecting new data: a jurisdiction holds reciprocal or qualified status or it does not, and the charge follows mechanically from the cession. A factor built around an assuming reinsurer's capitalisation and ability to meet its obligations requires the working group to assess firm-level information on entities outside the US reporting perimeter, a heavier lift that overlaps with the counterparty credit factors a ceding insurer's own risk-based capital calculation already applies. The working group's mandate puts the Cayman gap inside the capital formula while Bermuda's recognition keeps it outside, which makes status itself worth money to the reinsurers that hold it.

The letters arrive as the NAIC widens its perimeter: over the past two months it has been reviewing private credit exposure across a $1.2 trillion ceded book, narrowing its gap list, and pulling jurisdiction risk out of the supervisory checklist and into the capital formula. The offshore collateral picture has drawn attention on its own terms, and AM Best warned in late August that reserve credits on offshore annuity reinsurance are rising faster than the collateral behind them. A recapture charge puts the same question in capital terms, asking how much credit a US life insurer should get for a cession to an offshore reinsurer and what happens to that credit if the business comes back.

The letters cannot force a faster schedule: the 2027 deadline leaves the Life RBC (E) Working Group room to redraft, and the exchange does not say how the NAIC has responded or whether the association sought a meeting. Circa's procedural point cuts at the evidence the working group would have to produce alongside any factor, because a charge tied to domicile will be tested against whether recapture risk actually tracks jurisdiction, and the association claims no public analysis has yet shown that it does.

Romer's alternative is narrower than a blanket exemption: if a factor is built, he wants it to capitalise demonstrated residual risk and follow the assuming reinsurer's financial strength, capitalisation and ability to pay. That is a version the working group could draft, and it would leave Cayman's growth to compete on balance sheets rather than domicile. The next draft will show whether the charge is written around the jurisdiction or the reinsurer.