The International Association of Insurance Supervisors (IAIS) has published a comprehensive, in-depth analysis examining structural shifts in the life insurance sector.
The paper focusses on the increasing allocation to alternative assets within life insurers’ portfolios and the growing adoption of cross-border asset-intensive reinsurance (AIR). It also provides a detailed analysis of the drivers and potential risks of these shifts, alongside insights into how insurance supervisors are addressing these challenges.
Based on currently available data and analyses, the paper reports that systemic risk appears limited at the global aggregated level. Rapid growth of alternative assets and AIR, as well as concentrated exposures among certain insurers, warrant close monitoring to mitigate emerging vulnerabilities.
“Structural shifts in the life insurance sector present both opportunities and challenges,” said Toshiyuki Miyoshi, Executive Committee Chair of the IAIS.
“This paper underscores the importance of robust supervisory frameworks to manage emerging risks while recognising the potential benefits of these trends for insurers and the real economy.”
Risk related to alternative assets
Risks associated with alternative assets include valuation uncertainty, illiquidity and complexity. Addressing these risks requires robust risk management practices, including scenario analysis and liquidity risk stress testing, careful alignment with insurers’ liabilities, strengthened governance and valuation practices and robust and transparent credit risk assessments.
The paper provides the first globally agreed definition of alternative assets, marking a pivotal step in recognising their growing significance in the insurance sector, and supporting better consistency in the monitoring of exposures at the global level.
AIR transactions raise supervisory concerns related to complexity, recapture risk, concentration risk and the potential for these transactions to leverage cross-jurisdictional differences in reserve valuation, capital requirements and investment flexibility. This warrants supervisory scrutiny of AIR transactions, scenario analysis and assessment of counterparty risks, recognising exposures are concentrated in certain insurers and markets.
“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”, said Jonathan Dixon, Secretary General of the IAIS.
“Given the continued rapid growth in this area globally, and considering concentrations in certain insurers and markets regionally, it is critical the IAIS and insurance supervisors maintain a close watch.”
The full paper can be accessed here.