The growing use of private credit by life insurers to optimise investment portfolios and align asset allocation with product liabilities is garnering heightened attention from regulators globally, according to Moody’s analysis of regulatory capital regimes in the US, Bermuda, Europe, and Japan, alongside examination of life insurers’ investment portfolio. The regulation of insurers’ investments often varies significantly by jurisdiction.
Moody’s analysis aims to show the role of variations in regulatory capital requirements and reserve calculations in shaping life insurers’ investment choices.
It is highlighted that while regulation serves as a significant driver of asset allocation, other factors such as the breadth of capital markets also play a crucial role.
Rising rates have been largely favourable for US life insurer investment portfolios, driving higher investment income as reinvestment rates exceed book yields.
According to Fitch Ratings, the rising rates have played a large role in helping to mitigate macroeconomic headwinds, market volatility and the heightened probability of mild recession in 2024.
Regulators are proactively striving to adjust rules to better fit the shifting dynamics of capital markets. The possibility of declining interest rates alongside a steady influx of private credit assets may additionally expedite the expansion of private credit investments within life insurers’ portfolios.
Regional disparities are evident in the investment portfolios of life insurers, with a notable increase in global allocation towards illiquid and private credit assets in recent years.
In regions with the greatest exposure to private credit assets for the US life insurers and Bermuda, regulators are leaning towards implementing stricter regulations for these asset classes.
In Europe, where exposure to private credit is comparatively lower, policymakers and regulators are contemplating rule adjustments to encourage diversification of insurers’ investments.
This trend has been particularly rapid in the US and Bermuda, where life insurers also demonstrate significant exposures to structured assets. In contrast, European and Japanese insurers tend to prioritise sovereign bonds and equities in their asset mix.
The differences in investment strategies are partly attributed to variations in regulatory frameworks across regions.
Variances in regulatory capital charges influence insurers’ asset mix, with the cost implications of transitioning between asset classes differing significantly among regulatory regimes.
In jurisdictions where higher discount rates are applied to compute liabilities, there is a favourable environment for life insurers’ investments in higher-yielding illiquid fixed income securities.
The uncertainties surrounding the regulatory treatment of new investment vehicles, coupled with capital releases from asset and liability transfers between jurisdictions, particularly from the US to Bermuda, are prompting regulators to intensify scrutiny of reinsurance transactions and private credit assets.
