Morningstar DBRS is raising the alarm about the heightened regulatory risks insurers face when actively growing their allocations to alternative assets and asset-intensive reinsurance.

The commentary, entitled Heightened Regulatory Risks for Life Insurers Focusing on Alternative Investments and Asset-Intensive Reinsurance states that regulators are increasingly concerned about illiquidity, complexity and model risk associated with alternative investments such as structured finance products and private credit or equity. They also warn that “asset-intensive reinsurance transactions with offshore counterparties expose insurers to counterparty risk that must be well understood and carefully managed.” 

They add that the definition of an alternative or nontraditional asset is not fixed. “It is sometimes defined by what it is not (i.e., not a bond, stock, cash) and characterized by illiquidity and/or complexity,” Morningstar DBRS researchers write. 

Embedded leverage 

The note also examines correlation concerns, governance structure concerns and considers alternative investments with embedded leverage. These, they say, result in increased interconnectedness among insurers, asset originators, borrowers and the real economy, “which raises financial stability concerns.”

Key concerns expressed by the International Association of Insurance Supervisors (IAIS), namely about the proliferation of reinsurance deals specific to universal life, deferred annuities and bulk annuity or pension risk transfers are also examined. These are commonly referred to as asset-intensive reinsurance, according to the note. “These key concerns are being discussed in various global and national regulatory forums, including whether they pose significant threats to financial system stability.”