Financial supervisors are worried the rise of life insurance companies’ investment in alternative assets could endanger financial stability.
By 2022, life insurers held $35tr in assets, up from $14tr two decades earlier. These assets, previously mainly high quality bonds and equities, are increasingly private.
Low interest rates until 2021 and growing private equity investment in life insurance companies pushed many to seek alternative sources of yield. That led them to private assets, often bought through opaque offshore structures.
Jonathan Dixon, secretary general of the International Association of Insurance Supervisors, warned on Monday at a discussion hosted by the International Monetary Fund that the shift to private assets could threaten financial stability.
The median insurance company globally now has 11% of its assets in complex or private assets, according to the International Association of Insurance Supervisors’ Global Insurance Market Report. Of that, 2% is in securitizations, 7% in loans and mortgages, 1% in infrastructure and 1% in unlisted equities.
But the upper quartile allocations are 7% for securitization, 14% for loans and mortgages, 3% for infrastructure, 5% for unlisted equity and 2% for assets originated by related parties.
Dixon pointed to three risks. First, insurers could be forced into fire sales of illiquid alternative assets, destabilising markets.
Second, life insurers might be obliged to “recapture” risk sold off to reinsurers. “If this happens on a mass scale, there could be a situation where this forces insurers into asset sell-offs,” Dixon said.
Finally, he argued a deterioration in credit conditions could make life insurers pull back from providing financing, which “could severely restrict credit supply”.
A further complication is the trend of private equity funds buying life insurance companies.
Moody’s says there were $75bn of private equity-related life insurance M&A transactions between 2019 and 2024, half of all M&A in the sector. Blackstone acquired a $3bn stake in Resolution Life and Brookfield bought American Equity for $4bn.
“The interconnectedness between asset managers and life insurers increases the risks for contagion,” Dixon argued on Monday.
In part spurred on by private equity owners, life insurers have transferred hundreds of billions of reserves to Bermuda, which allows them to optimise reserves and capital.
According to Moody’s, $836bn of life insurer reserves are now held in the British overseas territory.
Further capital optimisation comes from often complex reinsurance contracts, often with other offshore entities.
For Shigeru Ariizumi, special adviser to Japan’s minister of state for financial services at the Financial Services Agency, these trends are “inherently cross-border”.
Scott White, president-elect of the US National Association of Insurance Commissioners, complained of a “lack of transparency” in reinsurance.
Supervisors agreed data sharing and collaboration between jurisdictions would be essential to managing potential risks to financial stability.
A more positive spin came from Doug Niemann, chief risk officer at Athene Holding.
He argued it was “in the spirit of financial stability to allow insurance companies to invest in a broader range of assets,” because diversifying capital provision channels lowers risk. He concluded: “Ultimately it is healthy.”