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The past decade's low rate environment challenged traditional life insurers' business models and has been a catalyst for ongoing shifts in the sector. To sustain profitability, life insurers have increased exposures to riskier and less liquid asset classes. Some have also offloaded risks through complex reinsurance agreements, often to offshore centres, partly with an eye to economising on capital. Private equity firms have been a driving force behind these trends. They have funnelled investment into private markets by acquiring or partnering with life insurers or assuming insurance portfolios through affiliated reinsurers. While more diversified investments and greater risk-sharing can, in principle, support insurers' resilience, losses in private markets could propagate risks across an increasingly interconnected and complex insurance landscape.1
JEL classification: G22, G28, G32.
The life insurance and annuity ("life insurance") sector plays a pivotal role in the financial landscape. Life insurers provide financial protection and savings products to households and represent a key source of funding for governments and the real economy. In 2022 they managed total assets of about $35 trillion, around 8% of global financial assets, up from $14 trillion two decades ago (FSB (2023)).
During the era of exceptionally low interest rates, from the aftermath of the Great Financial Crisis (GFC) until late 2021, life insurers' traditional business model encountered significant challenges. Low rates undermined the sustainability of legacy insurance policies that promised high guaranteed rates of return. Furthermore, subsequent reductions in guarantees, introduced to mitigate pressure on returns, dampened demand for new policies.
Pressure on traditional business lines contributed to reshaping the life insurance landscape by accelerating two interrelated trends (eg IAIS (2023, 2022)). First, by reducing profit margins, low rates intensified insurers' efforts to develop risk-sharing strategies to cut costs and economise on capital. These efforts spurred the transfer of risks to affiliated or non-affiliate insurers, often located in offshore centres, and insurers' divestment from traditional business lines (eg policies offering guarantees). Second, by intensifying investors' search for yield, low rates underpinned the growth of private markets. Life insurers increasingly invested in these markets to raise and diversify returns, investing in riskier and less liquid assets. These trends have continued, and are poised to continue, even as higher interest rates have mitigated pressure on profit margins.