The retirement protection gap

In 2023, the retirement protection gap, the gap between retirement savings and the amount needed to maintain a desired standard of living in retirement (RPG), was estimated by the Global Federation of Insurance Associations (GFIA) to be USD51 trillion and growing.

The RPG has been fueled by, amongst other things:

An aging population.
Increased longevity.
High inflation and cost of living.
Market volatility.
The shift from defined benefit to contribution pensions.

A solution and its challenges

Asset-intensive insurance, such as annuities, retirement income products and pension risk transfer (AII), seeks to reduce the RPG and is becoming increasingly popular. AII products are complex and require robust asset/liability management over a long period, during which consumer, market and regulatory deviations will arise. Additionally, public shareholders of AII issuers expect solid returns on capital. Each of these challenges, amongst others, can hinder AII growth and, in some cases, exacerbate the RPG.

Supporting the solution

Asset-Intensive Reinsurance (AIR) offers an attractive alternative capital source to support AII issuer growth and reduce the risks of underfunded AII. AIR insurance involves the reinsurer assuming both the risk (liabilities) and assets from the cedent (the AII issuer). This allows the cedent to free up capital for other investments or products while the reinsurer can optimize the investment strategies on assets to match the corresponding liabilities. With its long-duration investor base, risk and asset management expertise and access to high-yield assets, private capital has been ideally positioned to sponsor AIR. Many of these private capital AIR structures are domiciled, and have operations, in Bermuda.

AIR in Bermuda

On 21 March 2025, the Bermuda Monetary Authority (BMA) published its “Insights & Reflections on Asset-Intensive Reinsurance in Bermuda” (Insights Paper) which highlights Bermuda’s unique advantages in the AIR market, including:

A well-established and expert-driven (re)insurance sector.
Robust and adaptable regulation, solvency requirements, stress testing, and disclosure obligations, tailored to the specific characteristics of AIR.
Access to capital provided by asset managers, family offices, and pension funds seeking long-term insurance-linked business.
A skilled workforce with expertise in actuarial science, law, finance, and consulting, is crucial for navigating complex AIR transactions.
Strong global connections and Bermuda’s strategic location enhance its position as a hub for international reinsurance.

AIR Bermuda regulation

Bermuda imposes a risk-based solvency requirement on its (re)insurers. It holds Solvency II equivalence and has NAIC Qualified Jurisdiction status. Recently, various quantitative enhancements have been made to the Bermuda valuation regime. From a qualitative perspective, in support of the sustainable growth of AIR in Bermuda, the Insights Paper notes that the BMA has been proactive in enhancing its regulatory framework by:

Ensuring that (re)insurers maintain adequate capital and solvency positions.
Regulating transactions that significantly alter the (re)insurer’s risk profile.
Requiring detailed information on asset allocations, liquidity, and risk management practices related to AIR.
Aligning with the Insurance Core Principles (ICPs) issued by the International Association of Insurance Supervisors (IAIS), of which the BMA is a founding member, particularly ICP 13 concerning reinsurance and other forms of risk transfer.

AIR Bermuda supervision

The BMA is known as a pragmatic and collaborative regulator and the Insights Paper underscores this. The report emphasizes the BMA’s commitment to communication with other regulators involved in cross-border AIR transactions. The BMA seeks to understand the motivations for AIR transactions, assess the collateral quality, and ensure appropriate risk management practices are in place at both the ceding insurer and the reinsurer. At all times, the BMA prioritizes transparency and adequate safeguards for policyholder interests.

The core function of the (re)insurance industry is managing risk. The Insights Paper evidences that AIR issuers in Bermuda manage risk prudently. Bermuda AIR participants are not seeking lower capital requirements and less regulation. Median solvency ratios are 259%, notably higher than the 100% minimum or the 200% that most insurers target, according to the Insights Paper, which outlines the ways that the BMA monitors the potential impact of AIR on the financial stability of Bermuda’s (re)insurance sector. Key areas of focus include:

Assessing potential systemic risks arising from a high concentration of AIR.
Ensuring that (re)insurers have sufficient liquid assets to meet obligations, especially under stress scenarios.
Evaluating the risks associated with the assets backing AIR liabilities, including credit, market, and interest rate risks.
Stress testing and scenario analysis.
Ensuring insurers consistently maintain solvency levels above regulatory minimums.

AIR Bermuda data

The Insights Paper also summarizes data from Bermuda’s AIR insurance market which paints a picture of a mature and stable industry:

80% of AIR transactions are collateralized, significantly reducing counterparty risk.
Asset allocations of Bermuda’s long-term insurers mirror those of their US counterparts with a significant allocation to fixed income securities.
77% of assets held by Bermuda long-term insurers are investment grade or higher, reflecting a strong emphasis on quality investments and a focus on higher-quality investments.
Bermuda’s long-term insurers’ median liquidity ratio of 418% even under a 1-in-200 stress scenario demonstrates strong liquidity even under extreme conditions.

The Insights Paper underscores the significant role of AIR in Bermuda’s thriving (re)insurance market and Bermuda AIR in the global AII market. The BMA has proactively adapted its regulatory framework to ensure the prudent management of risks associated with AIR, emphasizing supervisory oversight, transparency, and collaboration with other regulatory bodies. The data presented underscores the generally well-collateralized, high-quality, and liquid nature of assets backing Bermuda’s long-term insurance liabilities, contributing to the financial stability of the jurisdiction. The BMA’s commitment to aligning with international standards like ICP 13 further strengthens Bermuda’s position as a leading AIR domicile, instilling confidence and stability in an increasingly volatile world.