Guy Carpenter has reported that as of December 31, 2023, private equity-backed reinsurance transactions in Asia, representing $25 billion in assets, accounted for only 2% of the addressable market. The value of these deals, however, increased tenfold between 2019 and 2023.
According to the reinsurance broker’s report, the influx of private equity funds benefits the Asian life insurance sector, which faces significant regulatory changes and the introduction of International Financial Reporting Standard 17 (IFRS-17). New risk-based capital frameworks have been implemented in Australia, Mainland China, South Korea, Hong Kong, and Singapore, with similar changes expected in Japan and Taiwan.
These regulatory reforms lead life insurers to de-risk their balance sheets and exit longer-term or more capital-intensive liabilities. By engaging in these transactions, insurers can free up capital to improve their solvency ratios or reinvest in digitization or new, more profitable products.
Guy Carpenter notes that private equity firms are increasingly bullish on the life insurance sector, and Asian insurers are similarly optimistic about investing in private equity and private credit. This trend in Asia is outpacing changes in EMEA and the US.
For private equity-backed reinsurers, these transactions provide access to in-force books of business that offer permanent capital for reinvestment. Acquiring insurance assets in different markets also allows for greater diversification, Guy Carpenter observes.
While private equity investment in reinsurance is relatively new to Asia, Guy Carpenter highlights that it is well established in regions like the US, where Berkshire Hathaway's acquisition of National Indemnity in 1967 marked the beginning of such interest.
This interest grew after the 2008 financial crisis. By the end of 2022, private equity firms owned 137 US insurance companies with $533.7 billion in assets, representing 6.5% of total US insurance assets, according to the National Association of Insurance Commissioners.
Guy Carpenter also mentions that regulators globally have scrutinized the involvement of private equity firms, with a US Treasury Department panel and the International Monetary Fund raising concerns about systemic risks. Issues from some smaller deals in Europe that failed, putting policyholders' funds at risk, have contributed to this scrutiny.
However, these unsuccessful transactions represent a small fraction of the overall trend. Most insurers view private equity-backed reinsurance as a vital source of capital, with their funds collateralized and separated from other assets within substantial, well-funded reinsurers financed by credible global firms, Guy Carpenter notes.
In most cases, customers experience no change, which is essential for a sector known for longevity and stability. The insurer retains servicing and administration of the policies. Consumers benefit as insurers, with bolstered balance sheets, reinvest proceeds into new initiatives and products, enhancing the customer experience.
This also provides the carrier with greater stability to pay non-guaranteed benefits such as dividends and bonuses, ensuring customers receive the products they purchased.
Private equity-backed reinsurers are monitored by both Asian regulators and their home regulators. Most of these groups are domiciled in Bermuda, which received Solvency II equivalence from the European Commission in 2016, aligning its regulatory regime with those in the US and Canada. The Bermuda Monetary Authority has continued to enhance its supervisory regime, Guy Carpenter notes.
As with traditional reinsurers, all elements of the reinsurance structure are negotiated, analyzed, tested, and transparent. The reinsurer aligns with an insurer’s appetite for volatility and risk, providing access to asset classes and investment expertise not typically available to traditional carriers, according to Guy Carpenter.
Guy Carpenter expects private equity interest in Asia’s life insurance sector to remain strong over the next decade, welcomed by carriers as they meet increased capital requirements and seek enhanced profitability. The recent increase in transactions is likely just the beginning, potentially benefiting the long-term health of the sector.
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