Treasury and Fed Tell States to Watch Life Insurers More Carefully

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Federal regulators are nervous about the investments and non-U.S. reinsurance inside many life and annuity issuers.

The Financial Stability Oversight Council said in an annual report released Friday that state insurance regulators and the National Association of Insurance Commissioners need to get more information about life and annuity issuers' private market investments and offshore reinsurance, and to consider reducing how much of the value of private equity assets and private credit assets the issuers can include their risk-based capital ratios.

"All of the issues in the FSOC report have already been identified by the NAIC, and various workstreams exist to address the concerns," the NAIC said in a statement.

What it means: FSOC is supposed to help the U.S. Treasury Department, the Federal Reserve Board and other federal agencies keep risks at life insurers, real estate investment trusts, mutual fund companies and other companies from tanking the financial system.

Its interest in use of private credit and offshore reinsurance could make it more likely that existing NAIC projects in those areas will lead to real changes.

The changes could make some life insurers more transparent and more stable. If they have a big effect on many players, they could also make future life and annuity products more expensive and less flexible.

FSOC basics: Congress included the provision creating FSOC in the Dodd-Frank Wall Street Reform and Consumer Protection Act, a 2010 law passed in response to the 2007-2009 financial crisis.

Dodd-Frank drafters wanted to create a body that could help all federal financial services regulators monitor the U.S. economy as a whole, including in the life insurance industry and other sectors beyond the scope of federal regulators; watch for potential threats to U.S. financial stability; and coordinate regulators' response to crises.

The chair of FSOC is the Treasury secretary, Janet Yellen.

The council also has eight other voting members who are the heads of federal agencies, including the chairs of the Federal Reserve and the Securities and Exchange Commission.

The 10th voting member of FSOC is an "independent member having insurance expertise" — currently Thomas Workman, the former president of the Life Insurance Council of New York.

Report details: All FSOC members, including Workman, signed the new FSOC annual report.

In the past, U.S. regulations encouraged life insurers to invest mainly in corporate bonds from companies with high credit ratings.

At the end of 2023, life insurers had about $800 billion in private credit assets and other nontraditional assets, many used outside asset managers to manage more than 10% of all of their assets, and private equity-owned life insurers held about 20% of the life sector's cash and investments, FSOC officials said in the new annual report.

The life insurers have set up big reinsurance arrangements with companies based in places like Bermuda, and many of the reinsurers are owned by the same companies that own the direct writers, officials said.

Meanwhile, officials said, life insurers are selling more annuities with flexible withdrawal rules, products aimed at businesses that have flexible withdrawal rules, and other products that could expose them to sudden demands for cash.

"Even well-capitalized insurers may struggle to cope with unexpected withdrawals if they do not have sufficient liquidity," officials said.

Many life insurers now participate in the Federal Home Loan Bank system, and some could use that as a source of funding during times of financial stress, officials said.

The NAIC and state regulators are starting to develop new disclosure rules and asset adequacy testing rules for the assets supporting the offshore reinsurance arrangements, and officials said they like those efforts.

"Additionally, the council encourages state insurance authorities and the NAIC to consider concentrations of risk and counterparty exposure to affiliated offshore entities," officials said.

The NAIC said its Life Actuarial Task Force was talking about the possibility of changing reinsurance disclosure rules.

The NAIC has started to respond to changes in life insurers' investments by acknowledging the shift in an investment framework document and a "list of considerations" document. It is also asking for more information about private investments that have private credit ratings.

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