Regulators increase scrutiny of insurers’ private credit investments
Regulators are seeking to change rules to keep pace with evolving capital markets, as insurers continue to increase their exposure to private credit.
A report by ratings agency Moody’s, published yesterday (15 May), focused specifically on life insurers and identified that a potential decrease in interest rates and strong supply of private credit assets could accelerate growth of private credit investments by that group.
However, regulators are increasing their scrutiny of reinsurance transactions and private credit assets, in particular tightening regulation in jurisdictions where exposures to private credit assets are the highest, such as the US and Bermuda.
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The report found that assets managed by Bermudian insurers mostly cover liabilities underwritten in other parts of the world. Notably the report reveals 68 per cent comes from the US, 28 per cent from Asia, and five per cent from Europe.
In the US, the National Association of Insurance Commissioners (NAIC) is mulling several changes to the regulatory regime, with many of them focused on capital charges on investments, according to Moody’s.
The NAIC has already implemented an interim risk-based capital factor of 30 per cent on all structured security residual tranches, while collateralised loan obligations (CLOs) are scheduled to increase to 45 per cent by the end of 2024.
“Although the industry has little exposure to residual tranches, regulators are weighing updates to capital charges for CLOs and other asset-backed securities (ABS) out of concern that capital charges for mezzanine tranches could be too low and may not align with credit risk,” the report said.
Meanwhile the report said that some state regulators have expressed concern about the extent of offshore reinsurance.
“A recent proposal seeks to require companies to reflect reinsurance cash flow in the asset adequacy testing that they conduct to determine if additional liability reserves are needed. Any increase in reserves would also impact the RBC total asset requirement,” the report said.
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Bermuda has tightened its regulatory regime this year, including applying more stringent assumptions on the modelling and discounting of the best estimate liability.
Tightening the discount rate provides less flexibility on using higher rates for greater risk assets such as alternatives. Despite this the discount rates will likely remain higher than in the other jurisdictions, according to the report.
The Bermuda Monetary Authority (BMA) is also requires insurers to receive approval on all proposed block transactions before they are completed.
Elsewhere, Moody’s expects European policymakers to take a closer look at capital charges imposed on securitisations under Solvency II.
“There is an increasing focus on the capital markets union (CMU), an EU plan to create a single market for capital and in particular to provide businesses with a greater choice of funding at lower costs and notably provide SMEs with the financing they need,” the report explained.
However, changes to the European regime are expected to take time and remains subject to the European elections in June.
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