At the end of last year, EIOPA published its Financial Stability Report for 2022. One of the main topics of the report is the role of private equity (PE) in the EU insurance sector, particularly in the context of portfolio transfers of life business.
The data collected by EIOPA shows that, in the last few years, life insurers have offloaded portfolios with higher guaranteed rates to improve capital efficiency, as the profitability of these books was challenged by the low interest rate environment. The majority of these transfers involved run-off portfolios.
Conversely, portfolio buyers (some of which were backed by PE funds) benefited from low funding costs and saw the opportunity for generating returns by acquiring life portfolios. These returns were generated by:
- economies of scale - acquisition of multiple businesses with similar characteristics allowed for cost reductions;
- extensive use of reinsurance to optimise capital; and
- non-traditional asset allocations, such as real estate and collective investment funds.
EIOPA highlights that these measures are the focus of supervisory risk assessment for PE-controlled insurers. From a supervisory perspective, extensive use of reinsurance makes the safety of policyholder claims dependent on the ability of the reinsurer to meet its obligations and the data shows that most of such reinsurance is concentrated in specific jurisdictions. Non-traditional investment allocations may result in higher credit and liquidity risks. Overall, if other insurers follow these structures in order to remain competitive, there are potential concentration risks with possible consequences for financial stability.
EIOPA draws attention to the possibility that PE investment in life and annuities business may be driven by opportunities to add assets under management in order to generate fee income for investment management. Also, EIOPA highlights that "a potential misalignment may exist for PE-controlled insurers between the shorter-term objectives/strategy of the alternative asset manager investment model and the long-term commitment necessary for fulfilling annuity/life insurance policyholder claims."
However, the influence of PE in the life insurance sector should not be overstated - portfolio buyers are not necessarily part of a PE-controlled group. The results of EIOPA's survey indicated that PE-controlled entities were involved in a minority of EU portfolio transactions over the last 3 years, although there are limitations on the data which could lead to an underestimation. The low volume of transactions, which are concentrated in a few countries and parties, suggests that these transactions raise consumer protection concerns more than financial stability issues, for the moment.