Actuarial Notes

Private Equity and Life Insurers

By Fabio Cortes, Mohamed Diaby and Peter Windsor · International Monetary Fund · 2023 · CP341-104-25

Study guide: Exam CP-341

A December 2023 IMF Global Financial Stability Note (Note/2023/001) on the growing trend of private equity (PE) investments into the life insurance industry. It reviews that growth through the lens of the diverse acquisition incentives and strategies, the consequent changes to asset allocation and investment strategies of the acquired life businesses, and potential prudential and policy implications.

On the syllabus

Introduction

  • Prolonged low interest rates pressured life insurers offering guaranteed rates of return and pushed many large insurance groups to pivot from capital-intensive business lines toward capital-light business such as unit-linked products.
  • PE companies acquired exposure to the long-term, capital-intensive liabilities that life insurers are trying to exit; the insurers they own have increased illiquid investments in complex structured products, and use reinsurance to reduce longevity risks and long-term liabilities, which releases more capital to invest in riskier assets.

I The Growth of Private Equity and Private Debt

  • Figure 1. The Growth of Private Equity since the Global Financial Crisis
  • Figure 2. The Evolution of Private Credit

II Private Equity and Insurers

  • Figure 3. Strategies of Private Equity Companies in Relation to Life Insurance Companies
  • Box 1. Example of Unrelated Life Insurers Engaging the Services of PE-Influenced Reinsurers

III What Is Different about Private Equity–Influenced Life Insurers?

  • Asset Allocation
    • Figure 4. Growth and Asset Allocation of Private Equity–Influenced Life Insurers
    • Figure 5. Rising Exposure of Insurers to Illiquid Assets
  • Reinsurance and Regulatory Arbitrage
    • Table 1. Bermuda-Domiciled, Private Equity–Influenced Reinsurers
    • Figure 6. Growth and Illiquid Exposures of Private Equity–Influenced Reinsurers

IV Policy Considerations

  • US state regulators, through the NAIC, announced a list of 13 considerations in relation to PE-influenced insurers, developed by the NAIC's Macroprudential Working Group; its concerns include related party investments, structured securities and other complex assets.
  • Insurance supervisors are encouraged to deepen their analysis of the trend in portfolio transfers and takeovers by PE-influenced insurers and reinsurers, and data quality and availability are a key constraint.

References

Annex 1. List of Life Insurance Companies or Groups with Private Equity Influence

Sources