For years, private assets have made up only about three percent of insurers’ investment portfolios. But as carriers have become more comfortable targeting opaque assets like private equity, regulators are becoming concerned.
The National Association of Insurance Commissioners has made a concerted push over the past couple of years to improve and modernize oversight of insurance investments. This includes improving oversight of credit rating providers, refining risk-based capital rules, updating accounting practices, enhancing investment analysis, and adding transparency measures.
“From a regulatory perspective, the biggest challenge is making sure that the existing regulatory framework is adequately assessing and capturing the risks associated with these complex assets,” said Nathan Houdek, NAIC’S insurance commissioner for Wisconsin.
To better and more accurately classify bonds, NAIC issued new rules for its principles-based bond project last year, which will impact how insurance companies classify, value, and report bond investments. The PBBD rules redefine what constitutes a bond for regulatory capital purposes, moving from rigid definitions to a framework based on factors like legal characteristics, creditor relationship, and cashflow levels.
Steve Doire, founder and president of DCS Financial Consulting, outlined the risks inherent in this increased complexity. “If insurers are considering adding a new asset class to the portfolio, how does it fit in? What are the correlations? Further, with private markets, liquidity becomes a risk,” he said.
Doire initially outlined the risks at a recent private II conference but later agreed to go on the record with Institutional Investor Magazine. He explained that insurers may not be ready to make the long-term commitments some of these private equity funds demand.
“When you make decisions on private equity, you're making these 10-year, 12-year commitments,” Doire said. “You might be three, four years in, still paying commitments, and say, ‘I don't want the strategy anymore. It doesn’t fit into my portfolio or underwriting book any longer.’”
More insurers are targeting private assets. In a live poll conducted at II’s corporate funds and insurance portfolios roundtable in Washington D.C. in March, most insurance allocators (54 percent) revealed that they plan to increase their allocation to private credit over the next 12 months, while 63 percent plan to up their investment to asset-backed finance. Twenty-six percent intend to invest more in private equity over the next year.
And as they target more private assets, these insurers are looking to outsource. More insurance companies are outsourcing: A report from DCS and Clearwater shows that outsourced insurance investment assets reached $4.5 trillion in 2024, up 25 percent from the year prior.
