Discussions Ongoing

On March 16, 2022, Sen. Sherrod Brown (D-Ohio), chairman of the Senate Committee on Banking, Housing and Urban Affairs, wrote a letter to the Federal Insurance Office (FIO) and the National Association of Insurance Commissioners (NAIC) regarding his concern over the transference of life insurance and annuity products to investment firms like private equity funds and asset managers.

As Brown put it, “Many workers who chose to invest their retirement savings in conservative and long-lived insurance firms now find themselves paying premiums to much riskier firms with less experience in the insurance business.”

In the letter, Brown listed several concerns, among them:

• What risks do the more aggressive investment strategies pursued by private-equity controlled insurers present to policyholders?
• What risks do lending and other shadow-bank activities pursued by companies that also own or control significant amounts of life insurance-related assets pose to policyholders?
• Given that many private equity firms and asset managers are not public companies, what risks to transparency arise from the transfer of insurance obligations to these firms? Will retirees and the public have visibility into the investment strategies of the firms they are relying on for their retirements?
• Are state regulatory regimes capable of assessing and managing the risks related to the more complex structures and investment strategies of private-equity controlled insurance companies or obligations? If not, how can the FIO work with state regulators to aid in the assessment and management of these risks?

Since the NAIC is the primary regulator of the insurance industry (the FIO, which serves in an advisory role, has no regulatory authority), its return letter bears the most weight. Unfortunately, the content of the letter is more a primer on state insurance regulation than an in-depth assessment of the potential risks to policyholders and annuitants. For example, the response does not comment on private equity firms’ “track record of undermining pension and retirement programs,” as Brown writes in the first paragraph of his letter.

Regarding the risks relating to private equity firms’ “more aggressive investment strategies,” the NAIC cited collateralized loan obligations (CLOs), which largely consist of loans to large corporations syndicated by banks,
and then provided a link to a primer on CLOs.

The question regarding shadow-bank activities received a similarly tepid response, in which the NAIC stated that it “recognizes” and “closely watches” the potential for loss from such activities. The “risks to transparency from the transfer of insurance obligations” to private equity firms received a two paragraph response: since many private equity firms are publicly traded, their investment portfolios are subject to public reporting requirements, which are monitored by the state regulators, the NAIC stated. No mention is made of the potential risks.

The question on the NAIC’s ability to assess and manage the complex risks of private-equity owned life insurers received an unequivocable answer: “Without question.” Brown’s related query on how the FIO can assist state regulators in assessing these risks is not specifically addressed in the NAIC letter, which emphasizes instead the state regulators’ “extensive expertise and insight into the solvency, investments, corporate structure and management of U.S. insurers.”