IAIS

2025 03 – IAIS – [Draft] Issues Paper on Structural Shifts in the Life Insurance Sector – 75p

• 2025 – IAIS – Structural Shifts in the Life Insurance Sector  —  [BonkNote]
• 2025 03 – IAIS – [Draft] Issues Paper on Structural Shifts in the Life Insurance Sector  —  [BonkNote]  —  75p

• 16 – Comments on section 5.1 Macroprudential considerations
  • Run
• Question: Do ______________ act for ——————- as the Federal Reserve a

• 1 Executive Summary
  • Page 5of75 – Traditionally, life insurers have relied on high-quality bonds and equities to meet long-term liabilities. However, prolonged low interest rates and the need for higher returns and diversification have led insurers to increase their investments in alternative assets such as private equity (PE), real estate, infrastructure, hedge funds and private debt. This trend is continuing even with rising interest rates.
  • Page 6of75 – The primary aim of macroprudential policy for the insurance sector is to ensure that the financial system and insurers can absorb, rather than amplify, adverse shocks.
    • The main risks are linked to insurers’ forced liquidation of assets during stress, rapid withdrawal from key lending markets due to defaults and downgrades, and financial market disruption from mass recapture of AIR by one or more insurers.
• 2 Introduction
  • Page 6of75 – Over the past four years, the IAIS has closely monitored structural changes within the life insurance sector through its Global Monitoring Exercise (GME).
  • Findings from this work have been detailed in the Global Insurance Market Reports (GIMAR) from 2021 to 2024 and reported to the Financial Stability Board (FSB).
  • The primary objective of this Issues Paper is to provide a comprehensive analysis of the structural shifts within the life insurance sector, with a particular focus on the increased allocation to alternative assets and the adoption of AIR agreements. This paper aims to delve deeper into these emerging trends, providing a framework for understanding their implications and identifying potential areas for enhancement in the IAIS supervisory material.  More specifically, the main focus areas for this Issues Paper are: 
• 3 Increased allocation to alternative assets in life insurers’ portfolios
  • 3.1 Background
  • This has led many insurers to turn to or increase “non-traditional” or “alternative” investments such as PE funds, real estate, infrastructure, hedge funds private debt, and securitisations, amongst others, as a means to enhance returns and diversify risk.
  • This trend has continued even as interest rates have risen, suggesting that factors beyond the interest rate environment are influencing investment strategies. These alternative investments are currently used to support all liabilities, primarily legacy business but also to support underwriting of newer liabilities.
  • Banks have also retrenched from lending to middle-market firms following tighter bank regulation after the 2007-2008 Global Financial Crisis (GFC).2
  • The International Monetary Fund (IMF) has illustrated the rise of private markets showing that PE funds and private credit markets have increased approximately five-fold since the GFC.3
  • Page 8of75 – Private credit has developed as a lending solution for middle-market firms deemed too risky for large commercial banks and too small for public markets.
  • As first noted in the 2022 GIMAR report, the growing trend of PE involvement in the insurance sector is associated with a higher allocation to alternative investments.5 There are also some indications that PE-controlled life insurers are increasingly holding PE-sponsored corporate debt, including debt of firms sponsored by PE firms associated with the insurer, potentially creating more concentrated and correlated exposures to alternative assets.6
    • 5 IAIS. Global Insurance Market Report (GIMAR). December 2022.
    • 6 Bank of England. Financial Stability Report. November 2024.
  • Although alternative assets offer benefits, like other asset classes, they can also introduce significant risks.
  • A critical challenge in gaining a deeper understanding of this shift is the lack of a common definition for alternative assets and differing regulatory frameworks across jurisdictions. Supervisory practices also vary:
  • The trend towards alternative assets may also be influenced by herd behaviour, where insurers follow the actions of their peers rather than relying solely on independent analysis. This can lead to a concentration of similar risks across the insurance sector, potentially exacerbating systemic vulnerabilities. Herd behaviour can amplify market movements and create feedback loops, where the actions of a few large insurers drive broader market trends, further complicating risk management and regulatory oversight.
    • As such, it is essential for insurers to maintain robust risk management practices and for regulators to monitor industry trends and address or minimise potential adverse effects of herd behaviour on financial stability.
• 3.2 Global trends in life insurers’ investment in alternative assets 
  • p8 – The lack of a broadly accepted alternative asset definition makes quantifying the trend difficult. Additionally, the absence of comprehensive and standardised data further complicates efforts to accurately measure and analyse the global growth of alternative assets and their impact on life insurers.
  • p9 – Global supply of private credit, PE, real estate, infrastructure and hedge funds has been consistently increasing over the last 20 years. This growth was driven by several factors such as increasing demand by investors seeking diversification and higher returns, the growing number of alternative investment managers and hence expansion of investment opportunities, technological advancements and, ultimately, regulatory changes.
  • p9 – All United States (US) insurers report assets categorised as “other long-term investments” on Schedule BA, with PE funds, hedge funds and real estate assets representing about 73% of the total $533.7 billion in Schedule BA assets as of year-end 2023.11 While total Schedule BA assets have averaged about 7% annual growth from a total of $313.5 billion in assets in 2014, the year-end 2023 assets declined slightly compared to year-end 2022. US life insurers’ share of Schedule BA assets increased to 65% at year-end 2023 compared to 61% in the previous year. This notably does not include alternative assets that have been structured as bonds.
  • p9 – European insurers’ exposure to alternative assets was EUR 1,397.1 billion as of June 2024.12 Sigma estimates that European insurers’ allocations to illiquid and potentially risky assets backing traditional saving product liabilities increased from 8% in 2017 to about 15% in 2023. This trend has been linked to PE firms, with the Bank of England (BoE) estimating PE control of life insurance assets has increased by more than $1 trillion from very low levels since 2009.13
  • p9-10- These trends were first highlighted in the 2022 GIMAR, which noted a higher allocation to “alternative assets” by PE-owned insurers. The 2024 GIMAR reported the exposures of the global insurance sector to alternative assets.14 Based on a combination of supervisory classifications and available data, the IAIS highlighted exposures such as loans and mortgages (L&M), securitisations and real estate and noted the allocation to these asset classes appears to vary widely between regions and insurers.
  • p10 – Overall, IAIS data in combination with the findings of the survey suggest that while alternative assets currently do not pose a global financial stability concern, there might be prudential supervision concerns for certain insurers – which is largely in line with the findings of the GIMAR 2024.
• 3.2.1 Shifts in financial intermediation: banks, NBFIs and insurers
  • `p10 – The size of non-bank financial intermediation (NBFI)15 assets is estimated to have more than doubled in size between the start of the GFC in 2008 and end-2020. This can be compared to a much lower estimated growth in the banking sector of around 60% during the same period.16 According to the FSB, approximately 16% of total NBFI assets are made up of insurance assets.17 Notably, these numbers need to be interpreted with caution. On the one hand, only a portion of these assets could be considered to be alternative assets, while on the other hand, some of these assets might consist of investments into other NBFIs, potentially increasing risk correlations and overall risk.
    • 15 The NBFI sector is a broad measure of all non-bank financial entities, composed of all financial institutions that are not central banks, banks, or public financial institutions.
  • p11 – The increase in NBFI assets may be driven by stricter banking regulations deriving from the adoption of Basel III standards.  Basel III was introduced after the GFC to address excessive leverage and inadequate liquidity buffers in the banking sector. As a response, more stringent requirements with regard to capital requirements were implemented, with the main part phased in between 2013 and 2019.18 These regulations have increased capital requirements, introduced liquidity ratios (see Box 1) and imposed more rigorous risk management standards on traditional banks, rendering certain lending activities less attractive or feasible for them.
  • p11 – Box 1: High-level overview of regulatory requirements and risk management in banking and their relevance for insurers.
  • p11 – Monitoring risks in private credit: Insights into how banks monitor risks in private credit can inform insurance supervisors’ risk assessments for similar activities.
  • p11 – Potential transfer of assets between sectors: Given the additional constraints on banks due to liquidity and leverage requirements, as well as differences in risk factors and diversification benefits in risk-based regulatory frameworks for banks and insurers, insurance companies may increasingly engage in activities traditionally performed by banks, such as extending private credit. This potential shift underscores the importance of understanding the regulatory and supervisory frameworks governing these activities.
  • p11 – As a result, banks may have shifted some lending activities, including private credit, to NBFIs, which include insurance companies.
    • Leveraged loans have also been securitised and sold to other investors, such as insurers, via collateralised loan obligations.19
  • p11-12 – The growth in private credit provided by NBFIs may be influenced not only by regulatory differences. Insurance companies’ balance sheets may be well-suited for holding these assets because their liabilities are generally less liquid. It is also important to consider the differences in liability obligations and the structure of financial statements across jurisdictions.20 It is important to recognise the fundamental business model differences and the purpose of regulation in each sector, as these differences are crucial to understanding and addressing the unique challenges faced by each industry.21
    • Banks focus on deposits and loans, funded by short-dated liabilities, thereby engaging in maturity transformation.
    • Insurers focus on risk pooling and manage longer-dated liabilities, thereby accessing asset-specific benefits such as maturity matching / asset-liability management, diversification and higher yields.
• 3.3 A principles-based classification
  • p12 – 3.1 Rationale
    • p12 – This lack of definition leads to significant variations in how these assets are classified and subsequently regulated.
      • For instance, the surveys indicated that in some jurisdictions, equity funds and real estate are considered non-traditional assets, while in others, they are deemed traditional investments.
      • Additionally, in some regions, high-yield debt, equities and some emerging market debt are categorised as high-risk assets. These differences have underscored the need for a more consistent and harmonised approach to defining and regulating alternative assets.
    • p12 – The notion of proportionality²² is crucial.
      • This means that the impact of an investment in alternative assets on the insurer’s portfolio and risk profile should be evaluated relative to the size of the total asset portfolio, sophistication of risk management practices and overall risk exposure of the insurer. 
      • [Bonk:  – GOV (Senate) – Eric Dinallo / Richard Shelby (R-AL)]
    • p12 – Principles-based definition of alternative assets: Alternative assets are assets which display a high degree of either valuation uncertainty, illiquidity or complexity, or a combination of these.
    • p13 – In general, an asset type supported by a well-developed regulatory framework, alongside a liquid market and/or active secondary market, may not be considered “alternative” in one jurisdiction, even though it might be classified as “alternative” in another jurisdiction.
      • For example, in the US, traditional corporate private placements are not regarded as alternative assets because they do not meet the criteria of complexity and valuation uncertainty, even though they meet the liquidity criteria.
    • 3.3.2 Proposed principles
      • p13 – This section outlines in more depth the three key principles of (i) valuation uncertainty, (ii) illiquidity, and (iii) complexity, each containing multiple dimensions that require detailed consideration.
      • p14 – Certain data items are only available in a limited number of jurisdictions and, to add further layers of complexity, the same terminology may be applied to different underlying assets.
      • p14 – A key takeaway from the IAIS survey on alternative assets (see Annex 1) is that many jurisdictions do not have a formal definition of alternative assets and/or lack granular data on alternative assets and do not have specific regulatory or supervisory requirements for them
      • p14 – These results are outlined in Figure 2, where the asset classes have been ranked on average by supervisors using a qualitative assessment. Figure 2 indicates that there is not a single asset class where there is unanimous assessment to what extent the asset class meets the proposed principles.

• p22 – Overall, hidden leverage in traditional investments can be seen to significantly amplify portfolio risks, eg. repos of safe bonds to invest in higher-yielding assets increase financial instability. While both alternative assets and traditional assets are affected by hidden leverage, the impact can be more pronounced for alternative assets due to their higher volatility and lower liquidity, thereby potentially exacerbating the inherent risks and complexity of these investments.
  • [Bonk: Eric Dinallo – Not Leveraged]
• 3.5.3 Liquidity risks
  • Compared to other financial institutions such as banks, life insurers have traditionally been less concerned with liquidity risk due to the nature of their business model. Life insurers’ liabilities generally take longer to mature than their assets, and the upfront receipt of premium income can be used to pay future claims.
    • [Bonk: Pyramid Scheme – GOV
  • Additionally, insurers typically hold large amounts of highly liquid assets to meet potential liquidity needs. Consequently, regulatory frameworks have primarily focused on ensuring sufficient capital.
    • However, liquidity risk became a more prominent concern for insurers in recent years, with material sources of liquidity risk originating from both the liability and the asset side of the balance sheet.
  • p22 – Notably, there is a significant difference in timing of liquidity needs for margin calls, which need to be settled promptly, whereas liquidity needs from claims occur at a relatively slower pace and with a higher predictability.
    • [Bonk:  How are the Liquidity Needs regarding Policyholder Policy Loans taken into consideration? For example, Sales Strategies which are promoted on YouTube – For Example, LIRP, Life Insurance Retirement Plan (David McKnight), The LASER Fund (Doug Andrew), MPI Strategy (Curtis Ray), Infinite Banking (Chris Kirkpatrick, LIFE180 and Caleb Guilliams, BetterWealth). These are strategies used by large Marketing Organizations. Are there any statistics or information regarding the degree to which Life Insurance Policyholders are requesting Policy Loans? Information on Policy Loan repayment timefram or the uses of the proceeds? Is there information on past, current and future utilization of policyholders to use the Policy Loans? [Bonk: 1980s – Prudential? – Borrowing from Banks to provide Loans to Policyholders.]
  • p22 – Liquidty Shocks
    • For example, assets such as PE funds, unlisted property and infrastructure bring significant liquidity challenges. The lack of well-established secondary markets makes converting these assets into cash without a significant loss of value difficult in an orderly timeframe.
    • In contrast, some asset-backed securities, emerging market debt and mortgage backed securities are noted for their higher liquidity in some markets, benefiting from more active secondary markets that facilitate easier access to cash.
  • p22 – Although insurers often engage in a “buy and hold” investment strategy, they may need to liquidate some of their alternative assets in a severe stress scenario, which may prove difficult due to their illiquid nature.
  • p22 – Limited liquidity can hamper the effectiveness of risk management tools when assets cannot be liquidated to cover cash outflows, particularly because this lack of liquidity could become more pronounced during periods of market stress. Although insurers often engage in a “buy and hold” investment strategy, they may need to liquidate some of their alternative assets in a severe stress scenario, which may prove difficult due to their illiquid nature.
  • p23 – Effective liquidity management and robust regulatory frameworks for both private credit funds and insurers are essential to address these risks and ensure financial stability.
  • p23 – Box 2: Liquidity risks in private credit funds
    • p23 – Private credit is one of the fastest-growing asset classes globally. Insurance companies and other institutional investors have expanded their allocation to this asset class
    • p23 – In the context of private credit funds, liquidity risk can be a significant concern for funds which offer early redemption to investors.
    • p23 – Liquidity risk is mitigated by long-term lockups and other redemption constraints for investors.
      • p23 – However, several characteristics and developments in the private credit industry could give rise to liquidity concerns:
    • p23-24 – Payment-in-Kind (PIK) arrangements: PIK loans are becoming increasingly common in private credit, allowing borrowers to delay cash interest payments by adding interest to the loan principal instead. When PIKs are utilised extensively, cash inflows into the funds diminish, reducing available liquidity. This scenario can create a mismatch between contractual expected cash flows and the actual liquidity needs of the fund, especially if there are any increased redemption requests or unexpected additional capital needs from firms.
      • [Bonk:  Policyholder Sales Strategies using Policy Loans?]
    • p24 – Capital calls from private credit funds:
      • p24 – Private credit funds often combine loans with revolving facilities, leading to potential simultaneous and unexpected withdrawals by firms, which increases the need for cash within the funds. This liquidity stress can be transferred to end-fund investors through committed capital, causing insurance companies to face liquidity pressures from drawdown requests. Notably, private credit funds frequently establish back-to-back credit facilities with banks to finance investments and manage drawdowns, though publicly available data on these facilities is limited. To mitigate liquidity risks, the industry is making efforts to arrange such credit facilities with commercial banks. These arrangements can help manage liquidity risk if they are sufficient. The timing of capital calls, depending on contractual terms, can transfer liquidity stress either directly to fund investors or initially to the banking sector before reaching investors. As investors, insurers may have limited control over the timing of capital calls.
        • [Bonk:  Policyholder Sales Strategies using Policy Loans?]
  • 3.5.4 Links to PE firms and potential conflicts of interest
    • p24 – As PE firms acquire stakes in life insurers, the investment strategies often shift as insurance liabilities are increasingly deployed into potentially more risky and less liquid assets originated by the PE firm,47 earning fee income for the PE firm. If the insurer is under pressure to allocate capital to the funds and/or entities controlled by the PE firm or affiliated assets manager, this could have a negative impact on the investment practices of the insurers unless carefully managed.
    • p24 – Pressure to commit capital: The PE firm has an interest in obtaining a large fund commitment and may encourage associated insurers to allocate a significant part of their asset allocation to funds managed by the PE firm.
      • [Bonk: 1) AIG Life Insurance / AIGFP during 2008 Financial Crisis, 2) Apollo / Athene – FTX / SBF – Coffeezilla, 3) Apollo / Athene – Elizabeth Warren,
        • 4) Executive Life  and First Capital Life
          • 1995 – AP – Perceptions and the politics of finance: Junk bonds and the regulatory seizure of First Capital Life, by Harry DeAngelo, Linda DeAngelo, Stuart C. Gilson – 37p
            • In May 1991, one month after seizing Executive Life, California regulators seized First Capital Life (FCLIC). Both insurers were Drexel clients with large junk bond holdings, and both had experienced ‘bank runs’.
            • FCLIC’s run followed regulators’ televised comments that its poor condition necessitated a substantial cash infusion.
              • <Bonk – WishList> – VIDEO of “televised comments”
    • p24 – Time horizon:
      • The differing investment horizons could create conflicts of interest in the timing of returns and, by extension, the investment strategies. Life insurance companies are primarily concerned with paying policyholders’ claims over a longer time horizon, typically between 10 and 20 years. Meanwhile, in
        certain jurisdictions such as the US and Canada, PE firms have typically managed to a shorter time Horizon, with the average holding period of each investment just above seven years at the end of 2023, up from below six years during the period 2010-2022. 48 A PE firm may structure funds’ equities and private debt suitable for its preferential time horizon and encourage life insurers to invest in these.
        • [Bonk: Average policyholder holding period for their policies? Long-Term vs. Short-Term]
    • p25 – Risk Appetite:
      • This discrepancy could result in PE firms employing riskier strategies (compared to insurers) in their controlled funds to accelerate shortterm returns. As insurance companies typically favour a more cautious approach that aligns with long-term stability, higher risk-taking could potentially impact the insurance firm’s sustainability.
        • [Bonk: vs. Holding Companies owning Life Insurance Companies]
      • idiosyncratic risk
    • p25 – Concentrations, credit quality and fund structure:
      • Insurers which are associated with PE firms are increasingly investing in privately placed corporate debt where the same PE firm is a sponsor (sponsored
        lending). This can create concentration risk and potential correlations between the PE firm and life insurer.
        • In addition, although the overall credit rating on an asset could be investment grade due to internal securitisation by the PE firm, sponsored private debt is often more highly leveraged and underlying assets could have a higher default rate than suggested by the credit rating.⁴⁹
          • [Bonk: sounds like 2008 Financial Crisis – CDOs, RMBS
        • Furthermore, the insurer could invest in securitised tranches of the senior debt, or in a specific fund which is invested in either the equity, mezzanine tranches, or senior debt of the underlying corporate credit.
    • p25 – Information Assymetry:
    • p25 – Capital extraction has been identified as an additional risk. Although insurers may have capped upsides on returns, there is a risk of capital extraction by PE firms, which could reduce the capital distributed to policyholders and/or to cover potential losses.
• 3.5.5 Credit risk and credit ratings
  • p26 – Given that the cost of obtaining a formal credit rating is typically borne by the issuer,51
    • This funding model (ie issuer-funded rating) remains the norm despite potential conflicts that may arise as a result.
    • credit rating shopping
• 3.5.6 Regulatory capital-related issues
  • p27- For life insurers, the long-term nature of financial promises introduces significant uncertainty in valuing liabilities and supporting assets. Therefore, comparing regulatory capital frameworks requires considering the impact on liability valuation and the valuation methods used, not just the capital held for asset risks.

• 3.5.8 Information gaps
  • p31 – A lack of transparency and reliable data increases the risk of misjudging the true risk profile of alternative assets.
    • Insurers may inadvertently take on higher levels of risk than intended, potentially leading to credit losses.
    • Inaccurate valuations can result in improper pricing of insurance products and inadequate reserving, affecting an insurer’s solvency and ability to meet policyholder obligations.
    • Navigating the regulatory environment without sufficient information can lead to compliance breaches and operational inefficiencies, exposing insurers to legal and reputational risks.
    • p31 – To address these challenges, supervisors should ensure that insurers invest in enhanced due diligence processes to better understand the nature and risks of alternative assets if these assets constitute a material exposure. This includes thorough background checks, performance analysis, and capital and liquidity stress testing of investments.
• 3.6 Macroeconomic considerations
• p22 – 4  Rising adoption of AIR in the life insurance sector
  • As discussed in the previous section, the IAIS has identified a structural shift in insurers’ allocation to
    alternative assets. This shift can be more pronounced in insurers with asset-intensive products such as annuities, universal life, pension risk transfer and long-term care products where investment risk⁶⁰ is a significant risk being underwritten by the insurer.
    • ⁶⁰ The IAIS Glossary defines investment risk as “the risk directly or indirectly associated with or arising from the insurers ‘ investment activities”. Investment risk as used in the AIR section includes both risks that are significant without regard to the liability profile, such as credit and some market risks, and investment risks that are significant in relation to the liability profile. Such risks include reinvestment and disintermediation risks (together referred to as ALM risk) and liquidity risks which are interrelated with policyholder behaviour (ie lapse, utilisation of benefit options, etc).
      • [Bonk: Is an example of “utilisation of benefit options” Policyholder Policy Loans?  ie. LIRP – Life Insurance Retirement Plan, Doug Andrew – LASER Fund, IBC – Infinite Banking Concept. etc]
    • p22 – Economic conditions such as prolonged low interest rates and tight credit spreads, as well as demographic trends in developed markets have driven increasing demand for insurance products that are designed for retirement saving, making them inherently asset intensive.
      • [Bonk: Is Universal Life “designed for retirement saving?” – ie. LIRP – Life Insurance Retirement Plan, Doug Andrew – LASER Fund?]

• 4.1.1 Economics of the transaction
  • p34 – Economically, the cedent in an AIR transaction transfers the economic risks and rewards associated with the assets and insurance liabilities to a counterparty (insurer or reinsurer) who promises to fund the insurance claims of the cedent as they come due.
    • However, the cedent retains ultimate responsibility for administering the policyholder contract and paying the policyholders even if the reinsurer is unable to perform (see Figure 4).
  • p35 – affiliated vs unaffiliated
  • p35 – When the reinsurer can invest in higher-yielding assets than the insurer, the reinsurer can provide attractive pricing to an insurer.
  • p35 – Should the cedent recapture a collateral pool that is insufficient or inadequate, as measured in the context of local regulatory requirements, it can suffer a loss on recapture. This trade-off is a significant subject of the AIR negotiation between the insurer and the reinsurer and is illustrated in Figure 5.
• p39 – 4.1.6.4 Modified coinsurance (ModCo)
• p41 – 4.2 Jurisdictional approaches to reserving, capital requirement and investment flexibility
• p43 –4.2.1 Reserve valuation
• p43 – 4.2.1.1 Cash flow assumptions
  • The size and timing of cash flows from insurance policies depend on a number of factors that are uncertain, either due to the nature of the risk (eg mortality) or because the risk results from policyholder optionality (eg lapse, benefit utilisation). Therefore, in order to calculate the liability for expected cash flows, assumptions must be established for each variable.
  • Ex. United States
  • For example, mortality assumptions are set using published mortality tables developed from studies of general population mortality. They distinguish only by age and sex.
    • [Bonk: What about distinguishing by Smoking vs. Non-Smoking?]
  • … a practice referred to as cash flow testing is used to ensure that the formulaic reserves are no less conservative than what economic assumptions would dictate.
• p43 – 4.2.1.2 Discounting and adjustments
  • The discount rate or curve used in the calculation of liabilities is a key component to overall valuation and solvency.
  • p44 – There are three main aspects to a discount rate:
    1. Whether the valuation is recalculated for changes in economic conditions or fixed at inception, with no subsequent refresh; 
    2. The determination of the investable horizon or last liquid point, determining the horizon over which market data is used versus actuarial assumption; and
    3. The extent of the spread above risk-free returns, the allowance for credit risks and other adjustments.
  • In some jurisdictions, the discount rate is prescribed at inception of the insurance contract and thereafter held fixed. This is referred to as a “locked-in” discount rate as the insurer will always use the same discount rate in the future valuation, independent of market conditions. For example, in the US, discount rates vary by product type but are fixed at inception of the contract.
  • p45 – Capital Reequirement – Standard approach or full or partial internal model
• p47 – 4.2.4 Valuation basis for solvency purposes
  • The valuation basis is another fundamental jurisdictional difference in how the capital position of an insurer is measured. The most significant accounting basis difference is in the use of amortised cost versus fair value measurement.
    • Japan and the US are amortised cost-value based regimes for most assets and liabilities with discount rates locked in at issuance of the liability.
      • Starting in fiscal year 2025, however, Japan will implement an economic value-based balance sheet for purposes of calculating economic-based solvency ratios.
    • Other jurisdictions primarily utilise a fair value or market-consistent approach.
  • [Bonk: USA] – The use of an amortised cost approach recognises the long-term nature of the policyholder obligations by providing a stable basis for evaluating insurer solvency over time, avoiding the recognition of short-term market conditions that do not impact the insurer’s ability to meet long-term policyholder obligations. Use of amortised cost, however, does not produce a clear picture of asset-liability management, and therefore secondary mechanisms like cash flow testing are used to identify shortfalls that would not otherwise be captured. If these economic-based assessments produce shortfalls, additional reserves or technical provisions must be recognised; however, the insurer does not have the ability to decrease technical provisions based on positive outcomes of cash flow testing.

• p50 – 4.3 Supervisory concerns and responses
  • p53 – solvency versus accounting reporting
    • GAAP, IFRS, EU’s Solvency II and Solvency UK, etc.
    • Regardless of which approach is utilised, the objective of group consolidation is to analyse solvency and capital adequacy of the group, with special attention to intra-group transactions and knowledge regarding the fungibility of capital between entities within an insurance group.
• p53 – 4.3.3 Group-wide supervision overview and tools for AIR  
  • ^^p54 – Surveyed jurisdictions did identify areas for improvement in their approach to monitor AIR. Supervisors noted the information flow is highly dependent on the knowledge and engagement of each individual supervisor and proper review can require a high level of technical expertise.
  • p54 – Other aspects are specific to the asset-intensive insurance and reinsurance strategies, ensuring robust oversight of asset-liability management, model risk management and governance design and effectiveness, among other areas.
  • p54 – Collateral
    • [Bonk: GOV – CSPAN – England – Blunt Instrument]
• p55 – 4.3.5 Supervisory risk assessment
  • p55-56 – In the US, the NAIC’s Macroprudential Working Group (MWG) monitors and discusses all the abovementioned risks, including but not limited to counterparty, valuation, recapture, cross-jurisdictional and financial stability risks. The MWG regularly reviews US industry-wide reinsurance activity reports, which includes analytics around types of reinsurance ((Coinsurance, ModCo, Funds Withheld (FWH) Reinsurance Accounting Treatment)) and types of products ceded, assuming jurisdictions and affiliated and non-affiliated transactions as examples. These reviews and meetings are evidence of heightened monitoring. Subsequent to reviewing reinsurance activity, the MWG considers if any appropriate action is warranted. Currently, the MWG is considering the feasibility of implementing a micro and macro reinsurance risk dashboard covering key reinsurance risks and data points. Other considerations include a supervisor/ regulator education programme, and a stock take of insurance company reinsurance reporting and disclosures.

• • p53 – 4.3.3 Group-wide supervision overview and tools for AIR
    • p53 – Organisational structures can add an extra layer of complexity to the accounting, monitoring and
      supervision of affiliated AIR transactions.
    • ^^p54 – Supervisors noted the information flow is highly dependent on the knowledge and engagement of each individual supervisor and proper review can require a high level of technical expertise.
    • p54 – In looking at existing tools, supervisors recognised that the nature of risks associated with asset-intensive business is differentiated and traditional supervision may not be sufficient or appropriate to identify and address these differentiated risks.
  • p54 – 4.3.4 Data availability
    • p54 – Surveyed jurisdictions were also asked to elaborate on data availability and data gaps to monitor these ceded liabilities, types of insurance products, jurisdictions and the use of captive insurers. However, the US lacks the ability to identify retrocessions and differentiate between reinsurers and multiline insurers trends at the macro- and microprudential level.
    • p54 – In the US, detailed data is obtained through Schedule S, which includes information on assumed and ceded liabilities, types of insurance products, jurisdictions and the use of captive insurers. However, the US lacks the ability to identify retrocessions and differentiate between reinsurers and multiline insurers.
  • p58 – US
• p59 – Macroprudential and financial stability considerations arising from structural shifts in life insurance
  • 5.1 Macroprudential considerations
    • The key objective of macroprudential policy for the insurance sector is to ensure that the financial system, and insurers, can absorb rather than amplify adverse shocks. While both alternative asset investments and AIR offer several benefits, they have the potential to pose financial stability risks.
    • The IAIS Holistic Framework for Systemic Risk in Insurance (HF) recognises three key transmission channels for systemic risk: asset liquidation, interconnectedness (direct and indirect exposure channel) and critical functions.⁶⁵ Importantly, the HF states the condition for systemic impact is that the risk propagates to other market participants or the real economy.
      • ⁶⁵ IAIS. Holistic Framework for Systemic Risk in the Insurance Sector. pp 11-12. November 2019.
    • The insurance sector is linked to several key participants in the financial system and the real economy:
      • Alternative assets can be funding vehicles for real economy borrowers such as infrastructure projects, real estate, corporates and consumers (as a key driver under securitisation);
      •  Life insurers have long-dated commitments to policyholders in the real economy. This could involve pensioners who depend on the continued financial condition of the insurance sector for their pensions,  hich is a direct part of aggregate demand in the real economy;
      • Life reinsurers in AIR arrangements may provide commitments to a number of insurers from across the globe;
      •  Life insurers are also increasingly connected to a broader range of financial market participants like banks and alternative asset managers, either as providers of finance or through distribution of risks.
    • Consequently, disruptions in the life insurance sector can transmit to the financial system and real economy (see Figure 8).
  • p60 – Figure 8 Illustrated transmission of the risks
    • The diagram above represents schematically how stresses in the alternative asset markets or in the life insurance sector can transmit to the real economy and financial system.
      There are mainly three key risks:
      1. Insurers’ forced liquidation of assets in stress;
      2. Rapid pullback of insurers from key lending markets due to defaults and downgrades;
      3. Financial market disruption from a mass recapture of AIR by one or many insurers.

1. 1. 1. 1. Forced liquidation or fire sales
            • Insurers are generally considered to be countercyclical investors, either holding assets in stressed markets or being buyers when prices fall. However, empirical evidence is mixed and some sources note sell-offs in downturns.⁶⁶
              • Policyholder behaviour can, however, have a material impact on the liquidity position of insurers. Should surrenders rise above expected levels, insurers may not have sufficient liquid assets to meet demands.
            • [Bonk:]
              • Runs – Could they happen in the future? Have they occurred in the past? Runs occur?  Is it a definitional issue or an Information Gap issue? Examples of what people have referred to as Runs.
                • Michael Lovendusky, Stays, Moratoriums. Companies vs State Insurance Regulators.
              • What about Sales Strategies that utilize Policy Loans? LIRP, MPI, The LASER Fund, Infinite Banking,etc.
              • Mark Greene – 
              • Executive Life  – GOV – man
            • p60 – Notably, this impact will vary depending on jurisdictional differences with regard to regulatory frameworks and liquidity in combination with local characteristics in terms of overall insurer allocations.
              • [Bonk: Would an example of “regulatory frameworks” mean Moratoriums and Stays on withdrawals? Would it depend on the Company / Companies Stays and Moratoriums on Withdrawals?]
              • [Bonk: What would be the Media Risk if a Company or Insurance Regulators implemented Moratoriums or Stays on Withdrawals? YouTube wasn’t around when Executive Life Insurance Company or Mutual Benefit

• 5.2 Interconnectedness with the broader market
• p62 – 5.3 Current financial stability risks and the future
  • Existing information gaps for alternative assets and AIR need to be addressed to better monitor financial stability consequences and ensure that supervisors can quantify any increases in insurers’ global allocations and evaluate concentration risks. Supervisors and market participants should close information gaps to mitigate possible erosion of market discipline and trust.
  • herd behavior
  • Continued exchanges of best practice by supervisors will be a key part of this work.
  • In addition, continued financial stability assessments of the overall financial system, such as the
    FSB’s cross-sectoral work, supported by analysis from Standard Setting Bodies including the IAIS, will be an important factor in mitigating global-level risks.
• p62 – Review of the IAIS supervisory material
  • 6.1 Purpose of the analysis
    • …events like the IAIS Chief Risk Officer (CRO) and GME roundtables.
• p64 – 6.3 Potential areas of enhancement in the IAIS supervisory and/or supporting material
  • Based on the analysis, there are a number of areas where the IAIS should consider potential enhancement in the IAIS supervisory and/or supporting material, outlined in this section.
  • ICP 3: Information Sharing and Confidentiality Requirements
    • Overview: ICP 3 focuses on establishing robust frameworks for information sharing among insurance supervisors while safeguarding confidentiality.
    • Information sharing: Information on reinsurance treaties, outsourcing activities, or information from noninsurance supervisors, and contemplate cross-border aspects
  • p64 – ICP 7: Corporate Governance
    • ^^ Additionally, ICP 7 promotes sound management and oversight of the insurer’s business, ensuring the protection of policyholders’ interests.
  • p67 – ICP 14: Valuation
    • Overview
    • ICP 14 sets requirements for valuing assets and liabilities for solvency purposes, emphasising alignment with regulatory reporting methodologies. If alignment is not feasible, differences must be publicly explained, particularly regarding technical provisions. It stresses the importance of context and purpose in economic valuations and links to the total balance sheet approach in ICP 17.
    • Relevance: Consistent valuation of assets and liabilities, including reinsurance recoverables, is essential for an undertaking’s financial soundness and regulatory framework. Jurisdictional differences in regulation and accounting complicate consistency and harmonisation efforts. Alternative assets add challenges due to  valuation difficulties and jurisdictional risk differences. Reinsurance recoverables may need adjustments for credit loss. Valuations often involve models and management judgment, necessitating internal controls for accurate measurement. A harmonised approach to liability valuation is crucial to ensure consistent risk treatment and policyholder protection. In AIR, simultaneous asset and liability valuation is vital to ensure
      soundness and prevent regulatory arbitrage.
    • Potential areas of enhancement:
      • Internal controls for valuation: Defining market source hierarchy, management judgment, modelling considerations, internal controls and independent valuation review to ensure comprehensive and accurate valuation practices.
      • [Bonk: Agents, Consumers, etc]
  • p67-68 – ICP 15: Investments
    • Overview:
    • ICP 15 outlines regulatory requirements for supervisors regarding insurers’ investments. It ensures that  insurers make appropriate investments considering the risks they face, with assets invested securely, adequately diversified and capable of meeting payments to policyholders and creditors as they fall due.
    • p68 – Relevance:
      • Prudent investment of assets to meet obligations is crucial for the soundness of firms, policyholder protection and public confidence in the insurance industry. Many alternative assets are complex and less understood than publicly traded assets. As allocation to these complex assets increases, proper risk management becomes more important. AIR adds complexity with arrangements like retrocession and special purpose vehicles, necessitating prudent risk management, transparency and accountability.
    • p69 – Liquidity risk: Credit and surrender/lapse risks, influenced by external conditions and correlated with stress situations like margin calls. Consider the impact of reinsurance contracts on the cedent’s liquidity profile.
      • [Bonk: Media Risk]
• p69-70 – ICP 24: Macroprudential Supervision
  • Overview:
  • The aim of ICP 24 is to ensure that supervisors identify, monitor and analyse market and financial
    developments, as well as other environmental factors that may impact insurers and the insurance sector. Maintaining an overview of market developments helps to understand potential vulnerabilities in the industry and enables supervisors to take appropriate action to ensure the stability of the industry and the financial system as a whole. Consistent with this purpose, ICP 24 focuses on the general processes and procedures that supervisors should have in place concerning macroprudential supervision, as part of the overall supervisory framework.
    • [Bonk: Media Risk: YouTube]
• p70 – ICP 25: Supervisory Cooperation and Coordination
  • Overview: ICP 25 focuses on promoting cooperation and coordination among insurance supervisors
    across jurisdictions to ensure effective group-wide supervision, as well as among supervisors of noninsurance sectors.
  • Cross-Groups Information Sharing: Information sharing that spans separate insurance groups.
• p70 – Conclusion
  • The increased allocation to alternative assets in life insurers’ portfolios marks a significant shift, driven by the need to enhance returns and diversify risk.
    • Historically focused on high-quality bonds and equities, insurers are increasingly investing in alternative assets, even with rising interest rates.
    • This trend points to additional potential influences, such as market sophistication and capital optimisation.
  • p71 – Hidden leverage, conflicts of interest and information gaps can exacerbate these risks, necessitating robust risk management and oversight.

• 2009 1117 – FCIC – Hearing – Financial Crisis Inquiry Commission – Timothy Geithner, Secretary of the Treasury – Closed Session  —  [BonkNote]
  • [PDF-50p] 
  • AUDIO – [2009-11-17 FCIC staff audio tape of interview with Timothy Geithner, Department of the Treasury.mp3-48:48]
  • (p17) – Secretary Tim GEITHNER: — if the monoline insurance companies and AIG were not allowed to — were not able to write huge amounts of protection with no capital to back it up — when I said about capital, I meant among the regulated in the areas — if they had not been able to overwrite those commitments, it would have been a less serious crisis — a much less serious crisis.
    • And that’s just a more simple thing. It’s not about derivatives so much as being no capital to back a commitment. It doesn’t need a fancy — it’s not a fancy product or even so much oversight of derivatives.
    • It’s just the regulatory authority responsible for those institutions did not force them to hold capital against their commitments.