Senate Banking Committee Chair Urges FIO And the NAIC To Monitor Private Equity and Affiliated Offshore Reinsurance in the Life Insurance Industry

Earlier this month, United States Senator Sherrod Brown (D-OH), Chair of the Banking, Housing, and Urban Affairs Committee, urged the Federal Insurance Office (FIO) and the National Association of Insurance Commissioners (NAIC) to examine the increasing role of private equity and alternative investment classes in the life insurance market as well as offshore reinsurance. The Senator inquired if private equity and affiliated offshore reinsurers could pose systemic risks and requested that FIO include these topics in upcoming and future annual reports while adding that his committee will host hearings on these topics at an unspecified future date.

Senator Brown’s recent written requests to FIO Director Steven Seitz and NAIC President Dean Cameron follow earlier written requests to each agency back in March. At that time, Senator Brown raised concerns centered on private equity and pension-risk transfer, asking FIO and the NAIC to study the issue and report back to Congress by May 31. Senator Brown’s recent letters are his response to the agencies’ reports.

President Cameron, CEO Consedine, and Commissioners representing Connecticut, Missouri, and North Dakota responded to Senator Brown on behalf of the NAIC. In their response, the Commissioners reaffirmed the state-based insurance regulatory regime’s ability to safeguard the solvency of life insurers under their purview. The Commissioners underscored their continuing monitoring of the changing investment portfolios of life insurers during the extended low-interest rate environment highlighting the hunt for yield regardless of ownership structure while stating that “there is nothing that PE firms add to the playing field” that lessens state insurance commissioners’ ability to protect insurance entities within broader financial holding companies.

FIO’s response to Senator Brown’s request raised concerns around regulatory arbitrage and specifically highlighted Bermuda-based reinsurance providers. FIO noted transactions with affiliated offshore reinsurers resulting in large capital releases that may otherwise be impermissible with a domestic admitted reinsurer.

Last month, the NAIC’s Financial Stability (E) Task Force and Macroprudential (E) Working Group adopted what are being called “Regulatory Considerations Applicable (but not exclusive) to Private Equity Owned Insurers.” At the NAIC Summer National Meeting, workstreams from the recently adopted regulatory considerations plan were assigned to other NAIC working groups, such as the Risk-Focused Surveillance (E) Working Group and the Group Solvency Issues (E) Working Group to consider proposed actions such as revisions to Forms A, B, and D of the holding company Annual Registration Statement, and more specifically Form D affiliated agreements such as investment management agreements.

Locke Lord will continue to monitor developments before Congress, federal agencies, and within the NAIC.