The rising use of personal credit score by life insurers to optimise funding portfolios and align asset allocation with product liabilities is garnering heightened consideration from regulators globally, together with these highlighted in a current report by monetary analysis agency, Moody’s.
Nonetheless, the regulation of insurers’ investments typically varies considerably by jurisdiction.
Of their report, analysts performed a complete evaluation of regulatory capital regimes within the US, Bermuda, Europe, and Japan, alongside examination of life insurers’ funding portfolio allocations in every jurisdiction.
This evaluation goals to point out the function of variations in regulatory capital necessities and reserve calculations in shaping life insurers’ funding selections. It’s highlighted that whereas regulation serves as a big driver of asset allocation, different elements such because the breadth of capital markets additionally play an important function.
Regional disparities are evident within the funding portfolios of life insurers, with a notable enhance in international allocation in direction of illiquid and personal credit score belongings lately. This pattern has been notably fast within the US and Bermuda, the place life insurers additionally show vital exposures to structured belongings. In distinction, European and Japanese insurers are inclined to prioritise sovereign bonds and equities of their asset combine.
These variations in funding methods are partly attributed to variations in regulatory frameworks throughout areas. Variances in regulatory capital prices affect insurers’ asset combine, with the price implications of transitioning between asset lessons differing considerably amongst regulatory regimes.
Moreover, in jurisdictions the place greater low cost charges are utilized to compute liabilities, there’s a beneficial surroundings for all times insurers’ investments in higher-yielding illiquid mounted revenue securities.
Nonetheless, the uncertainties surrounding the regulatory therapy of recent funding automobiles, coupled with capital releases from asset and legal responsibility transfers between jurisdictions, notably from the US to Bermuda, are prompting regulators to accentuate scrutiny of reinsurance transactions and personal credit score belongings.
In areas with the best publicity to personal credit score belongings, just like the US and Bermuda, regulators are leaning in direction of implementing stricter laws for these asset lessons. In distinction, in Europe, the place publicity to personal credit score is relatively decrease, policymakers and regulators are considering rule changes to encourage diversification of insurers’ investments.
