Insurers’ exposure to private credit market raises questions
Insurance companies’ increasing exposure to private credit is raising some concerns, with regulators saying they’re keeping an eye on the development.
In July, Professor Ludovic Phalippou from Saïd Business School, University of Oxford spoke about the risks of insurance companies piling into private credit at a Financial Services Regulation Committee hearing.
“They are allowed to leverage 10 times $1 (£0.74) invested in a private credit fund, which is a fairly risky type of investment to begin with, and allowing insurance companies to have such a high leverage on something already levered is quite a wild move,” he said.
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He noted that they are sitting on top of many layers of leverage that could impact their ability to pay out, if there were a natural disaster in the UK.
“People would go to the insurance companies, which would not be able service the claims because they had piled up these private credit funds, the valuations were wrong, they would not be able to withdraw, the liquidity was not what they anticipated, they had all these layers of debt, et cetera,” he said. “The UK government would then have to step in.”
Alternative Credit Investor reached out to regulators around Europe to find out whether they are concerned about the risks of insurers investing into private credit.
Only the Swiss Financial Market Supervisory Authority (Finma) and the Italian Institute for the Supervision of Insurance (IVASS) responded.
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Finma said: “Private credit represents less than one per cent of the investments of Swiss insurance companies, though we are currently observing a sort of growing appetite. This is a topic on which we are currently placing a focus.
“According to existing regulations, insurers may only invest in assets and instruments whose risks they can adequately assess, evaluate, monitor, control and include in their reporting. Compliance with these requirements is something we are monitoring closely in companies with an increased appetite.”
Meanwhile, IVASS noted: “Italy’s exposure to alternative investments remains limited. However, appetite is growing in several European countries, which is why we are monitoring the situation closely.”
According to Will Keen-Tomlinson, vice president, senior analyst at Moody’s Ratings, there is a level of unpredictability introduced into the asset portfolio due to matching adjustments being extended to assets that are sub-investment grade following Solvency II reform.
He added that they would generally expect the portfolios to remain heavily geared towards investment grade. He also noted that with annuity portfolios, the payments are fixed and there is no catastrophe liquidity outflow scenario. “So the risk of being a forced seller is basically nil.”
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He believes that the risk is in credit migration and risk of defaults.
“In this scenario, we’re really putting reliance on either the insurers’ internal ability to rate and value these assets or potentially the work of their asset manager,” he added. “So this is where we say opacity is a risk in the industry.”
He added that the risk of becoming a forced seller is potentially greater in Europe than in the UK, which is why the holdings tend to be lower.
“Most European life insurance business is savings business that has some elements of lapse risk,” he said. “So typically we see insurers holding a buffer of liquid assets to cover that risk.”
