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The International Monetary Fund (IMF) has called for enhanced regulatory oversight on liquidity risks associated with life insurers linked to private capital groups. This comes amidst concerns over the increasing concentration of illiquid assets and offshore operations in less regulated regions. IMF officials Fabio Cortes, Mohamed Diaby, and Peter Windsor issued the warning, noting that firms such as Apollo, Blackstone (NYSE:), Carlyle, KKR, and Cinven control about 10% ($850 billion) of US life insurance assets.
Over 40% of these private equity-linked insurers’ assets are invested in illiquid strategies like structured credit and mortgage-backed securities. The IMF warns that these insurers are vulnerable to corporate defaults and credit downgrades due to rising interest rates. The organization recommends intrusive regulatory reviews of their valuation processes to mitigate these risks.
The recent collapse of Italian life insurer Eurovita, owned by Cinven, has amplified regulators’ fears of a sharp drop in the value of these illiquid investments when higher interest rates prompt policyholders to withdraw their funds. Andrew Crean of Autonomous Research underscores the mismatch between the long-term liabilities of life insurance and the shorter return timeframe of private equity managers, adding to the growing concern.
The IMF suggests applying a globally consistent consolidated capital standard to limit regulatory arbitrage by insurers shifting business to locations where rules are less stringent. This would offer flexible rules and tax advantages while ensuring the integrity of the insurance sector.
The Bermuda Monetary Authority, which oversees the growing offshore Bermuda-based reinsurance businesses, ensures strong cross-border collaboration and transparent information exchange with other regulators. However, there is potential for intragroup reinsurance transactions which could impact the solvency of insurers.
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