International Developments in Asset-Intensive Reinsurance (AIR) Attracting Global Attention: Insurance and Pension Focus

Overview

## 1. Report Overview This report, published on July 1, 2025, by Yasuo Uetake of Nippon Life Insurance Research Institute, explains international regulatory trends and discussions regarding Asset-Intensive Reinsurance (AIR). It particularly analyzes the movements of various national regulators around AIR, focusing on the public draft published by the International Association of Insurance Supervisors (IAIS) in March 2025, and the responses from the Bermuda Monetary Authority (BMA) and the Global Federation of Insurance Associations (GFIA). ## 2. Key Points - IAIS published a public draft on AIR in March 2025, expressing concerns about systemic risks - BMA indicated the need to strengthen AIR regulation and improve transparency - GFIA expressed the position that AIR can be addressed within existing supervisory frameworks - AIR accounts for 5.3% of global life insurance reserves, with Bermuda holding a 1.8% share - In the Japanese market, multiple AIR transactions have been executed since 2020, with market size estimated at $200-300 billion ## 3. AIR Structure and Characteristics ### Structure AIR is a transaction form that transfers investment risks related to insurance liabilities to reinsurers, primarily utilized for asset-intensive products such as annuities and whole life insurance. Transaction forms are classified into two types: 1. **Block Reinsurance**: One-time transactions that transfer specific portfolios or risks in bulk 2. **Flow Reinsurance**: Transactions that continuously transfer risks as new contracts arise ### Characteristics - Risk mitigation and capital efficiency improvement - Access to a broader range of investment assets - Increased complexity and potential for concentration risk - Greater emphasis on asset management performance than biometric risks ## 4. Market Size and Growth ### Global Market - AIR accounts for 5.3% of global life insurance reserves - Significant growth recorded over the past 5 years - Both cross-border and domestic transactions are active ### Japanese Market - As of Q3 2024, 3 of the top 10 life insurance companies have executed AIR transactions - Transaction size estimated at $200-300 billion (less than 1% of Japan's $3 trillion life insurance and pension reserves) - Multiple transactions completed between Japanese insurers and offshore reinsurers since 2020 ### Growth Factors - Increased demand for guaranteed retirement income (protection gap estimated at $51 trillion in 2023) - Insurers' need to improve capital efficiency - Requirements for advanced investment management ## 5. Key Player Trends ### Regulators - **IAIS (International Association of Insurance Supervisors)**: Expressed concerns about systemic risks and began considering regulatory frameworks - **BMA (Bermuda Monetary Authority)**: Promoting transparency improvements and strengthened supervision of AIR transactions - **National Supervisors**: Exploring new regulatory approaches based on recognition that traditional supervisory methods are insufficient ### Industry Associations - **GFIA (Global Federation of Insurance Associations)**: Claims existing supervisory frameworks are sufficient and advocates principle-based and proportionate supervision ### Reinsurers - Bermuda reinsurers maintain a median solvency ratio of 259% (significantly exceeding minimum regulatory requirements) ## 6. Regulatory Response ### IAIS Concerns - Potential increase in systemic risks - Need for appropriate regulatory supervision - Impact on financial stability ### BMA Initiatives - Requiring improved visibility of AIR transactions - Building robust regulatory frameworks - Commitment to prudential supervision ### GFIA Arguments - Existing supervisory frameworks are sufficiently capable - "Principle-based" and "proportionate" supervision is important - AIR is an important financial mechanism for managing long-term liabilities - Importance of international dialogue and evidence-based policy making ## 7. Risks and Challenges ### Key Risks - **Recapture Risk**: Risk of transaction reversal based on contract terms - **Concentration Risk**: Excessive dependence on specific reinsurers - **Complexity Risk**: Management difficulties due to complex transaction structures - **Systemic Risk**: Spillover effects to the entire financial system ### Regulatory Challenges - Limitations of traditional supervisory methods - Difficulty in supervising cross-border transactions - Need for new regulatory frameworks - Need for international regulatory coordination ## 8. Impact on Japanese Market ### Current Status - Gradual expansion of AIR utilization in Japan's life insurance market - Primarily used for asset-intensive products (annuities, whole life insurance) - Centered on transactions with offshore reinsurers ### Potential Impact - Improved competitiveness through insurers' capital efficiency improvements - Possibility of more diverse investment strategies - Potential increase in transaction costs due to regulatory strengthening - Need to respond to international regulatory trends ### Future Developments - Market size expected to expand (potential increase from current 1%) - Domestic regulations may be developed - More insurers may utilize AIR ## 9. Future Outlook ### Short-term Outlook (1-2 years) - Specification of regulatory frameworks by IAIS - Development of domestic regulations by national regulators - Strengthened efforts to improve AIR transaction transparency - Increased AIR utilization cases in Japanese market ### Medium to Long-term Outlook (3-5 years) - Progress in international regulatory coordination - Further growth and maturation of AIR market - Development of new risk management methods - Introduction of technology-enabled supervisory methods ### Industry Impact - Transformation of insurers' business models - Structural changes in reinsurance markets - Development of new products and services - Advanced risk management ## 10. Conclusion and Recommendations ### Conclusion AIR is an important financial innovation for the insurance industry, contributing to insurers' capital efficiency improvements and management of long-term liabilities. However, systemic risks and regulatory challenges also exist, making international regulatory coordination and the establishment of appropriate supervisory frameworks urgent priorities. ### Recommendations 1. **For Insurers** - Strengthening risk management systems is essential when utilizing AIR - Monitor regulatory trends and prepare for early response - Build transparent information disclosure and sound governance systems 2. **For Regulators** - Adopt principle-based and proportionate regulatory approaches - Actively participate in international regulatory coordination - Design regulations considering the balance between innovation and financial stability 3. **For the Industry Overall** - Promote international dialogue and information sharing - Advance evidence-based policy discussions - Cooperate toward sustainable AIR market development AIR is expected to continue developing as an important tool for the insurance industry, with healthy market growth expected under appropriate regulatory frameworks.