On March 16, 2022, Senate Banking Committee Chairman Sherrod Brown wrote to the National Association of Insurance Commissioners (NAIC) and the Federal Insurance Office (FIO) of the U.S. Treasury Department highlighting concerns about private equity’s growing role in the insurance industry and asking the two regulatory bodies to further study the issue and report to Congress no later than May 31, 2022.
According to the Senator’s letter,
“Investment firms like asset managers and private equity funds often take on much higher risk strategies than traditional insurance companies, and do not face all of the same capital, liquidity, and policyholder protection requirements as well-regulated insurance companies. Consequently, many workers who chose to invest their retirement savings in conservative and long-lived insurance firms now find themselves paying premiums to much riskier firms with less experience in the insurance business. While investment firms might benefit from huge profits in the short term, failure to adequately manage these risks may ultimately cost policyholders their retirement incomes.”
Senator Brown’s letter also expressed concern about the growing presence of private-equity-backed life insurers in the pension risk transfer (PRT) market and specifically referenced several recent PRT transactions, including Athene’s assumption of pension obligations to workers and retirees of Lockheed Martin and Alcoa.
Below are the questions Senator Brown asked FIO and NAIC to examine:
- What risks do the more aggressive investment strategies pursued by private equity-controlled insurers present to policyholders?
- What risks do lending and other shadow-bank activities pursued by companies that also own or control significant amounts of life insurance-related assets pose to policyholders?
- Are there risks to the broader economy related to investment strategies, lending, and other shadow-bank activities pursued by these companies?
- In cases of pension risk transfer arrangements, what is the impact on protections for pension plan beneficiaries if plans are terminated and replaced with lump-sum payouts or annuity contracts? Specifically, how are protections related to ERISA and PBGC insurance affected in these cases?
- Given that many private equity firms and asset managers are not public companies, what risks to transparency arise from the transfer of insurance obligations to these firms? Will retirees and the public have visibility into the investment strategies of the firms they are relying on for their retirements?
- Are state regulatory regimes capable of assessing and managing the risks related to the more complex structures and investment strategies of private equity-controlled insurance companies or obligations? If not, how can FIO work with state regulators to aid in the assessment and management of these risks?