New York oversight of insurance acquisitions could have broader reach

The New York Department of Financial Services has proposed stronger oversight and the need for increased transparency for certain acquisitions of life insurance (or reinsurance) businesses, particularly where the acquirer is an investor, such as a private equity firm.

The issue lies in the need for acquirers to have a long-term view of the business they are buying and the NY regulator clearly feels that, at times, there is a mis-match between the short-term view of a private equity firm and the long-term view of a life insurer.

The regulator has highlighted acquisitions of annuities businesses as particularly in need of oversight, with the customers of those life insurance businesses needing the assurance that their policies are going to be maintained by any acquirer.

As a result the NY regulator has stipulated new regulations calling for strong disclosure and transparency, enhanced regulatory scrutiny of operations, dividends, reinsurance transactions and investments, and increased financial accountability. The regulator also calls for reviews of any material changes to operations of an insurer acquired by an investment firm, to ensure an alignment of interests with the ultimate policyholders.

The regulations could have a broader reach though, which may increase the oversight of some of the trends we cover in reinsurance. They call for the need for scrutiny where an investor or acquirer may have a short-term view of an acquisition which gives it access to the assets of an insurer.

Private equity firms have been buying into life insurance and annuities businesses believing that they have the ability to better the insurers returns and thus profit from the underlying portfolio of assets. The strategy here is quite similar to a hedge fund which establishes or buys a reinsurer in order to profit from the investment of the premium float.

At the same time traditional insurers have been leaving the annuities business as they struggle to make headway in the current low-interest rate environment. Investment returns while maintaining a low-volatility strategy are not easy to come by and insurers have been keen to find buyers for these businesses.

The key takeaway from the regulation proposal is that we could see an increased call for scrutiny of any investor (be that private equity, hedge fund or other third-party investors) acquiring an insurer (or reinsurer) in future, perhaps even those acquiring a book of insurance.

Particular scrutiny could be placed on deals where the acquirer aims to make use of the underlying asset portfolio in order to profit. It’s easy to see how such regulation could put greater scrutiny on the hedge fund backed reinsurer model, or on other areas of insurance and reinsurance where third-party capital plays. That said, the fully-collateralized nature of the insurance-linked securities ILS market likely puts it outside of this type of regulatory oversight.

These regulations make perfect sense, seeking to ensure the acquirers are buying into insurance (or reinsurance) businesses for the long-term and that there is an alignment of interests between the acquirer and the ultimate policy holders, especially in how any assets are utilised.

But while making sense, as the majority of regulation does, any additional oversight could add time and complexity to transactions, acquisitions or investments in insurance or reinsurance, hence it is worth keeping appraised of the changes.

One other point to note is the increasing focus on more aggressive investment strategies at reinsurers who are seeking to boost their total return while premium rates soften. This too could come under scrutiny if it turns into a major trend in the industry, with regulators likely wanting assurance that the investment strategy remains aligned with that of a reinsurer needing to maintain capital in case of claims.

The focus on insurer and reinsurer asset management strategies, as well as on the ultimate owners of insurers or reinsurers assets, is a topic we suspect will increasingly receive regulatory oversight in years to come.