Fitch Ratings has issued a report indicating a positive outlook for the life insurance sector, citing beneficial outcomes from regulatory changes. The report focuses particularly on reforms within North America designed to bolster supervision and increase transparency, specifically impacting reinsurance. These regulatory enhancements, implemented by the National Association of Insurance Commissioners (NAIC) and the Bermuda Monetary Authority (BMA), are viewed as supportive of credit.
Fitch’s analysis highlights the growing complexity and illiquidity associated with certain structured securities, along with expanding offshore and third-party reinsurance. According to Fitch, the NAIC and BMA have improved regulatory frameworks to better understand and assess the risks associated with reinsurers.
Key initiatives by the NAIC include the principles-based bond classification project scheduled to begin in 2025, collateralised loan obligation, capital charges by the end of 2025, private letter ratings of investment securities slated for 2026, and asset-adequacy testing for ceded reinsurance, also by the close of 2025. The agency notes that the BMA’s regulatory adjustments have resulted in higher costs, fees, and capital requirements for reinsurers, effectively creating a higher barrier to entry.
Recently enhanced measures include in-depth inspections of key risks and concerns, asset and liquidity stress tests, higher required capital and regulatory approval of long-term block reinsurance transactions,” Fitch has stated.
Updates to the regulatory regime include advanced modelling, improved governance, better validation processes, and more detailed reporting requirements regarding insurers’ investment portfolios. These updates reflect the dynamic market conditions and aim to ensure that the BMA’s insurance regulations remain both transparent and effective while maintaining Solvency II equivalence and NAIC reciprocal jurisdiction status. There is intensified supervisory review of capital adequacy for privately rated investments due to the evolving investment complexities and the growth of offshore reinsurance.
Fitch notes a rising trend of scrutiny towards insurers’ increasing relationships with alternative investment managers, which may present conflicts of interest. The agency considers the improvements in investment risk management and governance as credit-positive, as they are frequently supported by effective monitoring of investment risks. These risks include limits, value fluctuations, derivatives, credit migrations, and defaults.
In recent years, some alternative investment management firms, such as Apollo (Athene), KKR (Global Atlantic), and Brookfield (Brookfield Wealth Solutions Ltd), have outright acquired insurance companies. Other firms, including Blackstone (Corebridge Financial), Carlyle (Fortitude Re), and Ares (Aspida), have taken minority stakes. This surge in partnerships and acquisitions between life insurers and alternative investment managers has been driven by the potential for higher yields, coupled with long-term and illiquid liabilities. Alternative investment manager-backed insurers often exhibit a higher asset risk appetite compared to the broader industry.
Compared to the wider life insurance domain, alternative investment manager-backed insurers allocate a larger portion of their portfolios to structured securities and private asset classes, and tend to have higher allocations to lower-rated instruments. Life insurers are facing sizable direct risks associated with private credit, considering their increasing investment exposure, which is magnified through less liquid and complex private assets like collateralised loan obligations.
Fitch estimates that the exposure to level-three investments, which are investments lacking a readily available market value and thus considered less liquid, reached 21% for North American life insurers connected with alternative investment managers as of the end of 2023, in contrast to 5% for non-affiliated North American life insurers.
These concerns are somewhat mitigated by the diversified investment exposures and asset mix of insurance companies. The life insurers followed by Fitch generally collaborate with large alternative investment managers that bring expertise and strong performance records. Furthermore, alternative investment manager-backed insurers typically align their assets and liabilities well in terms of duration and cash flow.
