With the growing use of asset-intensive reinsurance transactions, the insurance industry is grappling with new complexities and risks, underscoring the need for heightened due diligence, robust safeguards, and clear supervisory oversight to protect policyholders and maintain financial stability.
At the International Association of Insurance Supervisors (IAIS) annual conference in Cape Town, held in early December 2024, panellists discussed a continuing trend: insurers are increasingly allocating investments to “alternative assets”, such as private credit, private equity, securitisations, and infrastructure investments, while also expanding the use of cross-border, asset-intensive reinsurance. This shift was a key focus of the 2023 Global Insurance Market (GIMAR) report and continues to be a priority in the IAIS’s Global Monitoring Exercise (GME).
The GME is designed to identify key risks, monitor trends, and assess the potential for systemic risks within the global insurance sector.
The 2024 GME builds on a rich data set collected from about 60 of the largest international insurance groups and aggregate sector-wide data from supervisors across the globe, covering over 90% of global written premiums.
The 2024 GIMAR recaps that, in previous years, the low interest rate environment prompted life insurers to adjust their investment strategies, significantly increasing their allocations to alternative assets. However, even with rising interest rates, this trend persists, highlighting that interest rates are just one factor influencing these changes.
Although definitions of alternative assets vary across supervisors and insurers, common examples are private credit, private equity, securitisations, infrastructure investments, and hedge funds.
The report notes that “assets originated by related parties or held under asset-intensive reinsurance arrangements represent a small average proportion in the insurer pool. However, some individual insurers have a significantly higher proportion of these assets, which could amplify liquidity risks.”
Analysing the growing use of cross-border, asset-intensive reinsurance agreements, the report explains that these transactions transfer investment and biometric risks associated with long-term life liabilities. The report suggests that such agreements are likely to continue growing, driven by factors such as interest rates, credit spreads, pension reforms, and demographic shifts.
Drivers in the shift to alternative assets
The panel discussion focused on the risks associated with these trends and how significant they might be.
Nobuyasu Sugimoto, deputy division chief at the International Monetary Fund, explained that the shift to alternative assets is driven by the low interest rate environment and the search for yield, along with the wider banking sector’s exit from the same space because of the constraints of their balance sheets and leverage.
“Traditional life insurance and the defined benefit pension fund have a relatively higher space to absorb both credit and liquidity risk, and therefore it is kind of logical to see that some of the credit risk has been shifted from the banking sectors to insurance and pension funds to some extent,” he said.
Sugimoto also pointed out that regulatory differences among insurance regulators may have played a significant role in the shift.
“In the same regulatory environment, a higher allocation of risky assets may allow applying a higher discount rate, which would reduce the variation of the corresponding liabilities. This variation factor tends to be higher than the capital requirement increase when the duration of the underlying liability is longer.”
The question, according to Sugimoto, is how long this trend will continue. He noted that both insurers and retirement funds are gradually shifting to defined contribution (DC) and unique products, because these often allow some flexibility in asset allocation between safe and risky assets.
“These products have much lower capacity to absorb less liquid assets and products,” he said.
To respond to this shift, Sugimoto mentioned that the private credit fund sector is evolving towards semi-liquid structures to attract broader investor participation, including high-net-worth and retail investors.
“This could bring some difficult challenges to the private credit space on how to address liquidity needs arising from those investors,” he said.
Sugimoto noted that unlike insurance and retirement funds, which can stick with investments for 30 to 40 years, these investors may require redemptions. “They need some redemptions,” he said.
While the industry is trying to address this potential liquidity mismatch by imposing redemption gates and long notice periods, he pointed out that “the effectiveness of those tools are not tested”.
“The big question mark I have is if they can deploy those tools effectively, especially during the stress period, without creating panic to the retail and high net worth investors,” said Sugimoto.
Emergence of new risks linked
Panellist Andrea Maechler, deputy general manager of the Bank for International Settlements (BIS), shared insights into the significant shift towards private markets. She highlighted how BIS research revealed the strong interconnection between this move and the insurance sector, particularly life insurance.
“One thing BIS saw is that life insurance has really gone into more private markets, alternative markets,” Maechler explained.
She noted that, to economise on capital, life insurers have increasingly partnered with offshore reinsurance.
“Much of these portfolios have been shifted under the management of offshore asset-intensive reinsurance (AIR),” she said. This, she explained, brings great diversification to life insurance, allowing them to expand their portfolios. However, it also introduces new risks.
What was particularly interesting, she continued, was that the connection didn’t stop with reinsurance.
“These reinsurances are closely linked to private equities. For instance, the US used to hold less than 15% of life insurance assets, and now they hold up to 40%. So suddenly there is a link between life insurance, reinsurance, and private equity.”
Maechler pointed out that this trend adds significant complexity and opacity, which requires close monitoring.
Another concern Maechler raised is that life insurance assets may now be backed by less capital, less liquidity, and potentially less resilience.
“So far, it has worked beautifully,” she acknowledged, but because of these complex structures, it is important to figure out the overall resilience.
She also highlighted concentration risk, noting that because these structures are primarily based in a few jurisdictions, concentration could become a real issue.
Additionally, she pointed out a potential conflict of interest specific to private equity, which, due to its interconnections, also affects life insurance.
“You may have asset managers that allocate investment funds to assets that they themselves have originated,” she said, stressing the importance of strong governance within these structures.
Safeguards and due diligence in asset-intensive transactions
Halina von dem Hagen, chief risk officer at Manulife, mentioned that in the past year, Manulife completed three major asset-intensive transactions: one with Global Atlantic (a global financial group) in December 2023 ($13 billion liabilities), one with Reinsurance Group of America (RGA) in March 2024 ($6bn in Canadian UL), and another in December 2024 with RGA.
Manulife operates globally under its own name in Canada, Asia, and Europe, and as John Hancock in the US, offering insurance and wealth management services.
“We believe this market is here to stay,” she said, explaining that these transactions allow risk transfer off their balance sheet and unlock shareholder value.
Asked how they became “comfortable” with these transactions, Von dem Hagen explained, “We are involved from the onset… beefed up resources in risk, specifically to effectively challenge our business partners and ensure risks are properly mitigated.”
She further noted that they assess alignment with their strategy, particularly portfolio optimisation and de-risking the balance sheet.
She said counterparty risk is the primary concern. “We do our own risk assessments, but we also look at the breadth of the overall relationship because it helps align interests.”
She also emphasised the importance of structural protection, with counterparty risk typically over-collateralised.
Manulife’s investment guidelines cover asset ratings, diversification, and duration gaps relative to liabilities.
“There are top-up provisions, typically related to the asset trust, and ongoing monitoring to ensure we are comfortable with the protection.”
Additionally, they have the option to recapture collateral assets at Manulife’s discretion, based on asset strength and counterparty capitalisation.
“This is yet another feature of the trust design that provides comfort with the counterparty risk.”
Finally, Von dem Hagen mentioned that recapture risk is now part of their stress-testing. “Liquidity is another key risk,” she noted, as reinsurance transactions often involve asset repositioning, which can reduce due diligence time when liabilities are backed by alternative assets.
“So, we tend to transfer liquid assets, and as such, we pay attention to the impacts on liquidity metrics and how quickly we will reposition our own portfolio on the liquidity front, where our risk appetite is,” she said.
Supervisory focus
Commenting on the supervisory focus regarding reinsurance transactions, Gita Salden, executive board member of Supervision at De Nederlandsche Bank, noted that ultimately, supervisors must ensure the protection of policyholders’ interests and the stability of the financial system.
Salden highlighted key considerations for supervisors, including the alignment of interests, the complexity of transactions, and whether the transaction is fully understood. “Do we understand the motivation behind the transaction, and do we comprehend the complexity?” she asked.
She said the role of supervisory authorities is to ensure that insurers can demonstrate to the market that policyholders’ interests remain their primary focus.
Salden also noted that, as of 1 January 2025, insurance companies in the Netherlands will be required to seek approval from De Nederlandsche Bank before entering into an asset reinsurance contract.
“We are not against it. We just want to make sure we’re doing the right thing,” she said.
The IAIS is developing an Issues Paper that will provide an in-depth assessment of the key supervisory issues and practices in response to these structural shifts. This Issues Paper will inform enhancements to the IAIS supervisory and supporting material, where necessary, to ensure a globally coordinated supervisory response. Public consultation is scheduled for March 2025.
