Loading... Global Select role INSIGHTS RESPONSIBILITY ABOUT US Search 15 November 2021 Social Sharing 2022 Insurance Investment Outlook: Embracing Greater Complexity AUTHORS: Helen Zhou Remeza Head of Insurance Investment Strategies Jeannine Heal, CFA Insurance Client Advisor James McCormack Insurance Solutions Associate Tight asset yields are driving insurers to diversify income sources via strategic partnerships or mergers and acquisitions (M&A) between insurers and investment managers. These partnerships can come in several forms. Many PE firms have pursued partnerships via partial or full ownership of insurance companies, particularly annuity writers. For PE managers, the attraction is the long-term stable capital that comes with affiliated insurance assets. According to the Capital Markets Bureau of the National Association of Insurance Commissioners (NAIC), 177 US insurers were owned or controlled by private equity firms with total cash and invested assets of approximately $487 billion in 2020. That was up by about 200% from 89 insurers and 42% from $344 billion in 2019.1 The proliferation of the PE activity has caught the NAIC’s attention regarding its potential impact on the industry. The NAIC is also reviewing its definition of a bond, in part due to complexities related to securities with equity-like characteristics being filed as bonds. The NAIC has indicated that changes related to bond definitions likely won’t go into effect until January 2024 at the earliest. Separately, the NAIC is looking into private letter ratings and their rating accuracy.2 These changes may affect a security’s eligibility for filing exemption designation, the use of credit ratings, and the statutory capital charges. To further complicate things, it’s quite possible that certain investments will not be grandfathered, or that a transition framework may be created. Going forward, capital efficiency will become more important than ever. This year’s newly approved bond factors are expected to increase statutory risk-based capital requirements for life, property and casualty (PC), and health insurers broadly starting in 2022.3 That may lead insurers to increasingly rely on asset managers that can offer capital-friendly solutions and expertise in efficient funding sources such as Federal Home Loan Bank (FHLB) lending. Regulators have been gradually requesting more ESG reporting and testing, and we expect that trend to continue. For example, the UK Prudential Regulation Authority has requested UK insurers to stress-test investment portfolios for climate risk. In 2021, the UK central bank issued a Climate Biennial Exploratory Scenario (CBES) survey to analyze the climate risk of financial exposures, covering both assets and liabilities, of the country’s largest banks and insurers.4 In the US, ESG disclosures and testing vary by state. For example, New York and California have been particularly active in this area. NY has issued proposed guidance for its insurers regarding governance structure, financial risks, scenario analysis, and disclosures related to climate change.5 6 To help track insurance climate risk exposures, the NAIC adopted an Insurer Climate Risk Disclosure Survey in 2010 and a Taskforce on Climate-Related Financial Disclosures (TCFD) report in 2017.7 8 For more economic and asset class insights, see our full 2022 Investment Outlook: Opportunities in a Climate of Change. 1 Source: NAIC Capital Markets Special Report as of year-end 2020. 2 Source: PineBridge Investments, “Investment Implications of NAIC Revisions to SSAP No. 43R and Bespoke Securities,” October 2020. 3 Source: PineBridge Investments, “What New Risk-Based Capital Bond Factors Could Mean for Life Insurers, June 2021. 4 Source: https://www.bankofengland.co.uk/stress-testing/2021/key-elements-2021-biennial-exploratory-scenario-financial-risks-climate-change, June 2021. 5 Source: , March 2021. 6 Source: NYSDFS: An Analysis of New York Domestic Insurers’ Exposure to Transition Risks and Opportunities from Climate Change, June 2021. 7 Source: Assessment of and Insights from NAIC Climate Risk and Disclosure Data, November 2020. 8 Source: Task Force on Climate-related Financial Disclosures, October 2020. 2022 Investment Outlook Opportunities in a Climate of Change Explore Now Banner Curve Related Insights Global Select role COOKIES PRIVACY POLICY REGULATORY DISCLOSURE TERMS OF USE SITE MAP ABOUT PINEBRIDGE CAPABILITIES FIRM LEADERSHIP INSIGHTS MEDIA & PRESS RELEASES OFFICE LOCATIONS