Private Equity’s Insurance Bets Raise Risks, BIS Researchers Say

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

Buyout firms channel the insurance industry’s investments into private markets and contribute to a rising reliance on complex reinsurance agreements where 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 acquiring insurers as a way of gathering more capital they can plow into alternative assets. While that “investment expertise” boosted insurers’ profits and allowed them to offer their policies at more attractive prices, they’ve also become more complex and the exposure to illiquid assets could result in losses or a sudden cash squeeze, according to the researchers.

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

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

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

Private equity has boosted investments in life insurers at a higher pace than in other industries, yet such “activity has remained concentrated in the US market,” according to the report.