Private Markets Powering Life Insurers' High-Risk Shift

What's New

The life insurance industry's structural transformation since the GFC is being heavily influenced by the growing nexus between life insurers and Private Equity (PE) firms according to a recent paper by the Bank of International Settlements. This relationship has driven a significant shift in investment strategy toward riskier, less liquid private assets , such as structured credit and private credit/direct lending. PE-linked insurers are significantly more likely to hold these opaque investments and use complex Asset-Intensive Reinsurance (AIR) structures, predominantly offshore, leading to elevated systemic risk, especially in the Americas and Asia.

Why It Matters

The increased allocation to private markets introduces fundamental challenges to financial stability. These assets are harder to value, lack transparency, and are illiquid , meaning their true risk profile can be obscured until a stress event. The failure of a PE-linked European insurer in 2023 demonstrated how rising rates and solvency concerns can interact with this illiquidity, forcing procyclical asset sales that can amplify price movements and potentially destabilize the broader financial system.

Big Picture Drivers

• Yield Search: Prolonged low interest rates forced insurers to abandon safe, low-yield fixed income and intensified the search for higher returns found in illiquid private assets.

  
  

• PE Strategy: Private Equity firms gain access to insurers' stable, long-term funding streams, which they can channel into PE-originated assets for higher fees, creating conflicts of interest in asset allocation.

  
  

• Capital Relief: Asset-Intensive Reinsurance (AIR), facilitated by PE firms, is used to transfer policy liabilities and the backing assets offshore, freeing up capital for the primary insurer to deploy into higher-yielding, often riskier, investments.

  
  

• Ratings Game: Solvency capital requirements tied to credit ratings incentivize insurers to seek higher-rated exposures, leading to an increasing reliance on private/internal credit ratings for bespoke structured deals and private credit, further obscuring risk.

  
  

By The Numbers

• PE Structured Credit: PE-linked insurers allocate over twice as much to structured products (26% of total investments) compared to other insurers (11%).

  
  

• Affiliated Assets: PE-linked insurers invest significantly more in affiliated assets (14% of assets) compared to other insurers (8%).

  
  

• Private Ratings: 23% of PE-linked insurers' investments rely on non-publicly disclosed private letter ratings, versus only 8% for other insurers.

  
  

• Credit Spreads: Credit spreads for fixed income securities issued by PE-linked insurers are consistently higher than those of other insurers, indicating heightened market concern about their risk profile.

  
  

Key Trends to Watch

• Liquidity Risk Amplification: Illiquid Level 3 assets, which have grown in some jurisdictions to 10% of insurers' portfolios, complicate risk assessment, as their fire sales during stress could destabilize markets.

  
  

• Governance and Conflicts: PE-linked insurers face potential conflicts of interest as they may prioritize investing in high-fee, proprietary assets over maximizing policyholder interest, which weakens governance structures.

  
  

• Recapture Risk: AIR contracts include triggers that allow primary insurers to recapture risks if the reinsurer's financial condition deteriorates, risking widespread forced asset sales by cedants to cover recaptured liabilities, particularly in highly concentrated offshore markets.

  
  

• Synthetic Leverage: PE-linked insurers exhibit higher synthetic leverage via FX derivatives due to greater exposure to foreign assets (e.g., CLOs), and their tilt toward bilateral clearing of swaps (59% in 2024) increases counterparty risk.

  
  

The Wrap

The deepening engagement of life insurers with private markets and PE sponsorship represents a fundamental shift toward higher-risk, less transparent business models. Policymakers must adopt a macroprudential perspective to track common exposures, mandate detailed disclosures for private assets and reinsurance, and strengthen governance to mitigate the systemic risks arising from amplified illiquidity and conflicts of interest.