Diving into the complex world of life insurance and private equity, I’m thrilled to speak with a seasoned expert whose decades of experience in insurance regulation and financial markets offer a unique perspective on the industry’s transformation. With private equity firms now controlling nearly $700 billion in life insurance assets and steering insurers toward riskier investments like private credit and offshore reinsurance, there’s growing concern about hidden vulnerabilities. Today, we’ll explore how these shifts impact policyholders, the potential for systemic financial risks, and the evolving regulatory landscape.
How did private equity firms become such major players in the life insurance industry, and what’s motivating their involvement?
Private equity firms started snapping up life insurers over the past decade or so because they saw a goldmine in the long-term, stable capital these companies hold. Life insurance policies generate steady premium inflows that sit on balance sheets for years, even decades. That’s perfect for funding investments in higher-yield, less liquid assets like private loans or structured credit, which can generate bigger returns than traditional bonds. The motivation is clear: it’s a way to boost fee income and investment profits while using insurers as a vehicle to scale their alternative asset strategies. Since 2009, this trend has exploded, with firms transforming insurers into engines for private market bets.
What kind of influence do these firms have on the investment strategies of the insurers they acquire?
Their influence is profound. Traditionally, life insurers stuck to safe, predictable investments like government bonds or high-grade corporate debt to match their long-term liabilities. Under private equity ownership, there’s a sharp pivot toward riskier, higher-yield assets—think private credit, complex structured securities, and even loans to affiliated entities. About a third of the industry’s $6 trillion in assets now sits in private credit of various forms. The rationale is that these investments offer better returns, like an extra 80 basis points over comparable public bonds, which helps meet the guarantees promised to policyholders while satisfying investors. But it’s a balancing act with a lot more risk.
Can you explain what private credit is and why it’s become such a focus for these insurers?
Private credit refers to loans or debt instruments that aren’t traded on public markets. These can be direct loans to companies, often mid-sized businesses, or more complex arrangements like collateralized structures. Insurers, especially those owned by private equity, have poured money into this space because it offers higher yields compared to traditional fixed-income investments, especially in a low-interest-rate environment. It’s become a focus because private equity managers see it as a way to juice returns, but the catch is that these assets are harder to value, less transparent, and much tougher to sell quickly if cash is needed.
There’s been talk of a potential $150 billion capital shortfall for North American life insurers in a severe downturn. What does that mean for everyday policyholders?
That $150 billion figure, estimated by researchers, represents the gap between what publicly traded life insurers have in reserves and what they’d need to cover obligations if a major economic crisis hits—like a 2008-style crash. For everyday policyholders, this could mean delays in payouts if their insurer struggles to meet claims or redemptions. State guaranty funds exist as a safety net, but they’re not instant, and in a widespread crisis, they could be overwhelmed. If an insurer can’t pay out on policies or annuities, people might wait years for even partial recovery, which can be devastating for those relying on that money for retirement or emergencies.
How do offshore reinsurance arrangements factor into this evolving landscape, and what’s driving insurers to use them so heavily?
Offshore reinsurance, often based in places like Bermuda or the Cayman Islands, allows US insurers to transfer risk off their books to another entity, freeing up capital for other uses. Over 60% of US reinsurance purchases now happen offshore, double the share from just a few years ago. The appeal is twofold: looser regulatory oversight in some jurisdictions means lower capital requirements, and it can be a tax-efficient way to manage funds. Private equity-owned insurers use these setups to stretch their risk limits further, supporting aggressive investment strategies. But it’s a double-edged sword—less oversight can mean less transparency about the real strength of these arrangements.
What are some of the risks tied to this heavy reliance on offshore reinsurance for the broader system?
The biggest risk is that if an offshore reinsurer fails to pay up during a crisis, the US insurer is left holding the bag, potentially unable to meet policyholder claims. Because oversight varies widely across jurisdictions, some reinsurers might not have the capital they claim, and resolving failures can take years—look at cases where policyholders waited nearly three years for scraps after a Bermuda reinsurer collapsed. Systemically, if multiple insurers face this issue at once, it could strain state guaranty funds and shake confidence in the industry, potentially triggering wider financial ripples since insurance touches so many parts of the economy.
Annuity sales have nearly doubled in recent years. What’s fueling this surge, and how does it connect to the broader trends we’re discussing?
Annuity sales hit $434 billion in 2024, nearly doubling in just four years, because millions of aging Americans are desperate for predictable income in retirement. With pensions disappearing and Social Security under strain, annuities offer a promise of stability—regular payouts regardless of market swings. This surge ties directly to private equity’s influence because insurers are marketing these products aggressively to capture that demand, using the premiums to fund riskier investments like private credit. The flip side is that if too many policyholders cash out at once, especially during a downturn, insurers could face a liquidity crunch, unable to sell illiquid assets fast enough to meet redemptions.
Looking at the valuation of some of these private assets, critics have used terms like “mark-to-myth accounting.” Can you unpack what that means and why it’s a concern?
“Mark-to-myth accounting” is a jab at how some private asset valuations are more guesswork than science. Unlike public stocks or bonds with clear market prices, private credit and similar investments are often valued by the managers themselves, with a lot of leeway. Some firms keep values steady even in shaky markets, while others mark them down sharply, creating huge inconsistencies. It’s a concern because it obscures the true health of an insurer’s portfolio. If valuations are inflated, a sudden market downturn could reveal big losses, eroding capital and trust. Regulators and academics worry this opacity hides systemic risks that could surface unexpectedly.
If a major market slump hits and many of these private investments lose value simultaneously, what could happen to the industry?
A synchronized drop in private investment values during a market slump could be a disaster for the industry. These assets are often illiquid, meaning they can’t be sold quickly without steep losses. If insurers need cash to cover policyholder claims or annuity redemptions, they might be forced into fire sales of other assets, driving down prices further and potentially triggering a downward spiral. A $150 billion capital hole, as estimated, might need to be filled by regulators or bailouts. Worse, if confidence collapses, you could see a run on insurers—policyholders rushing to cash out, amplifying the crisis. It’s not just one company’s problem; the interconnectedness of the financial system means it could spread fast.
What’s your forecast for the life insurance industry over the next decade, given these trends and risks?
I think the next decade will be a critical test for the life insurance industry. Private equity’s grip will likely deepen, pushing even more assets into private markets unless regulators step in with stricter capital rules or transparency requirements. We’re already seeing moves by groups like the National Association of Insurance Commissioners to rethink oversight, especially around offshore reinsurance and private asset valuations. But if markets stay calm, the high yields might keep things stable, and annuity demand will probably grow as demographics shift. My concern is a black swan event—a sudden crisis exposing these hidden risks. Without stronger guardrails, we could see isolated failures snowball into broader instability. It’s a space to watch closely, balancing innovation with the need to protect policyholders.