NAIC launches review of private equity-owned insurer issues

On December 7, the National Association of Insurance Commissioners (NAIC) Financial Stability Task Force voted in a virtual meeting to expose, for a 30-day comment period, a list of “Regulatory Considerations Applicable (But Not Exclusive) to Private Equity (PE) Owned Insurers.” The Task Force assigned to its Macroprudential Working Group the role of coordinator of the ongoing evaluation of these considerations.

The decision is the latest public expression of increasing concern among regulators about the recent growth in number and complexity of private equity-owned insurers.

The current exposure has some antecedents in NAIC-directed efforts that began two years ago.  In November 2019, the Statutory Accounting Working Group began an effort to change the Statement of Statutory Accounting Principles (SSAP) No. 25, which provides accounting rules on insurer transactions with related parties and affiliates.

That work culminated in changes to SSAP No. 25, which changed the definition of “related parties” to include, among other things, parties who have disclaimed control of an insurer.  The change was adopted in March 2021 and will apply to insurers’ 2021 annual statements.  A new blank, Schedule Y Part 3, has been added to the annual statement to capture this information.

The exposure of the list of considerations followed a public discussion of these issues at the Task Force’s meeting on September 30, at which NAIC staff announced that 177 companies are owned or controlled by private equity companies.  Staff expressed the view that transactions among private equity affiliates have been a key regulatory concern, but that the NAIC’s current insurance holding company regulatory framework, which was developed in the context of stock and mutual companies, may not be capturing all relevant transactions.

Staff mentioned that the use of investment management agreements is a particular cause for regulatory concern.  Staff’s perception is that PE owners look to extract value from insurers via fees rather than from dividends or salaries.  Furthermore, staff voiced concerned that insurers were becoming more heavily invested in assets, such as collateralized loan obligations, which are themselves exposed to their PE owners’ other portfolio companies.

The exposure contains 13 enumerated topics. Key elements, among others, are as follows:

• Understanding control issues, which may exist among entities with less than the traditional 10-percent ownership interest at which control is presumed
• Identifying insurer affiliates in a private equity-controlled holding company structure
• Analyzing material provisions of investment management agreements to determine whether they are arm’s length and reasonable to the insurer
• Determining whether possible short-term interests of private equity ownership are properly aligned with the long-term nature of insurance liabilities, particularly with respect to life insurance
• Evaluating affiliate investment arrangements, including the use of offshore reinsurers and sidecar vehicles, and
• Assessing operational, governance and market conduct practices of private equity entrants into the insurance market without prior industry experience and the possible over-reliance on TPAs by PE owners without insurance expertise.

It is unclear what will happen next as the NAIC begins to review these issues as there was no comment by interested parties during the Task Force’s December 7 meeting.  Moreover, the industry trade associations, which generally consist of long-operating insurers, may not engage on these issues with the same level of attention that they apply to other more traditional NAIC activities.  Private equity interests may be concerned, therefore, that regulators may make decisions on these issues without significant input from interested parties.

We will report future developments.