Heightened Regulatory Risks for Life Insurers Focusing on Alternative Investments and Asset-Intensive Reinsurance

Morningstar DBRS published a commentary discussing the heightened regulatory risk associated with life insurance companies that have been actively growing their allocations to alternative assets and asset-intensive reinsurance.

Key highlights include the following:

-- Regulators are concerned about illiquidity, complexity, and model risk associated with alternative investments such as structured finance products and private credit or private equity.

-- Asset-intensive reinsurance transactions with offshore counterparties expose insurers to counterparty risk that must be well understood and carefully managed.

-- Potential supervisory and regulatory policy responses that address the aforementioned concerns are under consideration in various jurisdictions.

“In many ways, insurers are fulfilling the increased demand for private credit, as tougher bank regulations have caused banks to reduce their risk appetite,” said Nadja Dreff, Senior Vice President, Sector Lead, North American Insurance Ratings. “In our view, an effective policy response should also consider the liquidity of insurers' liabilities as well as the quality of their risk management frameworks, thus making it very challenging to formulate an effective, one-size-fits-all policy approach.”