The world's insurance regulators are watching for two threats that have not attracted much attention in the U.S. life and annuity sectors: hidden leverage and discretionary asset valuations.
Officials at the International Association of Insurance Supervisors list those risks in their latest Global Insurance Market Report.
The risks both affect what regulators classify as "alternative assets," or instruments such as private equity stakes, private debt and bundles of loans that are unlike the piles of bonds traditionally used to house life and annuity issuers' reserves.
Hidden leverage involves use of financing instruments inside alternative investments that, technically, aren't debt but act like debt.
Hidden leverage inside investment funds or other investment vehicles could make those vehicles riskier than they seem, according to the IAIS.
Discretionary valuations are moves by insurers to put a high value on alternative assets that are difficult to value.
When insurers hold assets priced using discretionary valuations, "subjective methodologies may not reflect fundamentals or current macroeconomic conditions," the IAIS said.
