Offshore Reinsurance: Is Self-Regulation the Answer?

When insurance companies reinsure obligations with offshore companies in locations such as Bermuda, US insurance regulators no longer have jurisdiction (or control) over these liabilities. They become the responsibility of foreign regulators. This is attractive for insurance companies – if a foreign country has very few insurance regulations, it is much easier (and cheaper) for an insurance company to comply.

The trouble is, this creates a riskier environment for policy-holders. The US regulates the insurance industry to protect policy-holders. In a low-regulation environment, some policy-holder protections are minimized or lost.

Recently, at an S&P Global Ratings conference, the Chief Executive Officer of Prudential Financial, Charles Lowrey, stated that in his view, the way to replace this lost policy-holder protection is for the insurance industry to regulate itself. See this article.

However, it seems unlikely that this is a satisfactory answer for protecting policyholders. According to Matt Zagula of Smart Advisor Network (in an interview with Life Annuity Specialist), insurance companies are caught between opposing interests – on the one hand they must make decisions in the interests of policyholders, and on the other, they have fiduciary duties to their shareholders. These opposing pressures make it very difficult for insurers to effectively self-police.