Why Bermuda Is Life Insurance Heaven - ThinkAdvisor

What You Need to Know

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Members of the American Academy of Actuaries met online last week and revealed answers to some of the most pressing questions in the life, health and annuity sectors — including, for example, why U.S. life insurers all seem to be rushing to do business in Bermuda.

One speaker answered that question with a table in a presentation slide deck: Bermuda is gentler when it’s deciding how much a life insurer’s investments are really worth.

When a life insurer is feeding investments into U.S. risk-based capital ratio calculations, it has to reflect regulators’ ideas about risk by cutting the value of private equity investments, infrastructure stocks and some other types of investments by 47.4%.

When a life insurer is making similar types of capital calculations for Bermuda regulators, the capital charge for private equity investments is just 35.6%, and the charge for infrastructure stocks is just 19.8%.

The rules mean that, in a good year, a life insurer that looks like a Clark Kent investor in the United States will look like a Superman investor in Bermuda. It can afford to cut costs for the customers, pass more profits on to the owners, or both.

Life Insurers’ Investment Rules

Issuers of life insurance, annuities, long-term disability insurance and other long-duration policies depend much more heavily on investment earnings than issuers of major medical insurance and most property and casualty products to generate some of the revenue needed to pay claims.

U.S. regulators’ rules encourage life insurers to invest most of their money in high-rated corporate bonds, mortgages and mortgage-backed securities.

Bermuda’s capital rules mean it’s easier for life insurers based there to try to increase returns by investing in assets, such as public company stock and private equity funds, that may expose the holder to more risk but also offer higher investment returns.

The American Academy of Actuaries

Actuaries are people who have taken tests to show they understand the math needed to manage insurance companies, pension funds and similar types of arrangements.

The American Academy of Actuaries is a professional group for actuaries that was founded in 1965. The academy works to show federal, state and local policymakers how actuaries are thinking about major public policy questions.

Academy teams look at issues as varied as the effects of COVID-19, what climate change might do to P&C insurance risk, and how changes in the human life span might affect Social Security, Medicare and pension plans.

The Academy’s Annual Meeting and Public Policy Forum

Here are five questions academy members addressed in the public policy forum sessions accompanying their annual meeting, beyond Bermuda capital valuation rules.

1. Who’s in charge of the academy now?

Maryellen Coggins of Boston succeeded Thomas Campbell as the group’s president.

Coggins, who is the 2021-2022 president, is a managing director for risk and capital management services at PwC.

The new president-elect is Kenneth Kent, a consulting actuary with Cheiron.

2. Is a registered index-linked annuity (RILA), or index-linked variable annuity (ILVA), really any different from a traditional variable annuity?

Dodie Kent, Laura Hanson, Pete Weber and Ryan Berends answered that question in a slidedeck for a session on the products known as RILAs, or as ILVAs, or as buffered annuities, structured annuities or hybrid annuities.

The speakers said a RILA contract is much different from a traditional variable annuity, from an insurer’s perspective, because the RILA contract is “non-unitized,” meaning that the customer has no direct claim on the underlying assets. The holder of a traditional variable annuity typically has a claim on the underlying assets in the sub-account.

The investments are also different. An insurer invests a traditional variable annuity customer’s money directly in sub-account securities.

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