BIS study highlights offshore reinsurance exposure in insurers’ models

Private markets and proprietary models reduce transparency.

Structural shifts in the life insurance industry are creating new financial stability risks, as insurers increase their exposure to complex, illiquid assets and offshore reinsurance arrangements, according to a recent paper by the Bank for International Settlements (BIS).

In its paper The Transformation of the Life Insurance Industry: Systemic Risks and Policy Challenges, the BIS said that whilst these changes have supported growth and eased capital pressures, they have also made insurers more vulnerable to liquidity shocks and concentration risks. 

The 2024 collapse of 777 Re, a Bermuda-based private equity-linked reinsurer, underscored the dangers of opaque asset holdings and offshore reinsurance failures that can trigger liquidity strains and forced asset sales.

The BIS noted that greater reliance on private markets and proprietary valuation models has reduced transparency, whilst the shift from central clearing to bilateral derivatives trading has increased counterparty risk.

To address these vulnerabilities, the BIS urged regulators to tighten oversight by strengthening liquidity and capital frameworks, improving disclosure on alternative assets and reinsurance flows, and harmonising international standards to prevent regulatory arbitrage. 

It also called for stronger governance to manage conflicts of interest and a more macroprudential approach to monitoring common exposures and systemic linkages across insurers.