NAIC continues review of private equity-owned insurer issues

The Financial Stability Task Force, in its joint meeting this week with the Macroprudential Working Group, heard a brief report regarding the status of the list of “Regulatory Considerations Applicable (But Not Exclusive) to Private Equity (PE) Owned Insurers.”

The brief report provided during the meeting confirmed past indications that work on this list of considerations will continue in the coming months, if not years.

The paper exposed in December 2021 highlighted a perception among regulators that the increase in ownership by private requity firms or their providing outside investment management is a cause for scrutiny. 

The paper contained 13 enumerated topics.  Key elements, among others, are as follows:

• Understanding control issues, which may exist among entities with less than thex traditional 10 percent ownership interest at which control is presumed
• Identifying insurer affiliates in a private equity controlled holding company structure
• Analyzing material provisions xfof investment management agreements to determine whether they are arm’s length and reasonable to the insurer
• Determining whether possible short-term interests of private equity ownership are properly aligned with the long-term nature of insurance liabilities, particular with respect to life insurance
• Evaluating affiliate investment arrangements, including the use of offshore reinsurers and sidecar vehicles and
• Assessing operational, governance, and market conduct practices of private equity entrants into the insurance market without prior industry experience and the possible over-reliance on TPAs by PE owners without insurance expertise.

The paper generated a few comment letters in response.  Risk and Regulatory Consulting (RRC), National Alliance of Life Companies (NALC), American Investment Council (AIC), American Council of Life Insurers (ACLI), and National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) all submitted comments.  (NOHLGA’s comments were aimed exclusively at providing the NAIC with NOHLGA’s lengthy analysis of the guaranty associations’ coverage of group annuities as compared to that of the Pension Benefit Guaranty Corporation.)

All of the commenters, save NOHLGA’s, agreed in general that while the concerns raised by NAIC in the paper may have resonance with PE firms, those concerns are not unique to companies owned by or doing business with PE firms. 

RRC’s position generally underlined the concerns raised by regulators – that companies rely on “highly nuanced technicalities” to avoid labelling transactions as affiliated and that new owners may have antithetical interests to policyholders and often lack adequate experience.  The remaining members of the group all, to varying degrees, pointed out that focusing on the corporate ownership structure is ill advised.  If, according to the commenters, there are concerns, the most appropriate method for addressing them is to design narrowly tailored remedies for the conduct.  NALC, AIC and ACLI all cautioned the NAIC to proceed deliberately and to recognize that, given the low interest rate climate, life insurers are in significant need of alternative investments to continue to meet their ongoing liabilities and that PE firms are helping to fill that need.

The Task Force and Working Group promised that work would continue on this issue and would, to the greatest extent possible, be done in public so that NAIC will have the benefit of all interested parties’ expertise.

You may also enjoy our earlier alert on this process.  We will report future developments.