Private Equity Insurance Bets Increase Risks, BIS Researchers Say

Private equity firms have changed the business models of the life insurers they invest in, presenting risks that are more likely to materialize with higher interest rates, according to researchers at the Bank for International Settlements.

Buyout firms are channeling insurance industry investment into private markets and contributing to a growing reliance on complex reinsurance arrangements in which insurers assume liabilities from competitors in exchange for the assets backing them, according to an article in the BIS Quarterly Review.

Private equity heavyweights have spent years buying insurers as a way to amass more capital that they can deploy in alternative assets. While “investment expertise” has boosted insurers’ profits and allowed them to offer their policies at more attractive prices, they have also become more complex, and exposure to illiquid assets could lead to losses or a squeeze cash rush, according to researchers.

Insurers that are partly or wholly owned by private equity are twice as likely to invest in assets from buyout firms as compared, the researchers said, citing a study of more than 21,000 private market deals since 2006 until mid-2024.

If firms do not have adequate governance frameworks to address conflicts of interest, the risks may be “magnified given the potential for strategic mispricing of illiquid and hard-to-value assets,” according to the report.

The complexity of reinsurance also highlights the need for “rigorous group-wide supervision, systemic risk analysis and international cooperation,” the researchers said.

Private equity has driven investment in life insurers at a faster pace than in other industries, but such “activity has remained concentrated in the US market,” according to the report.

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