Life insurance capital management shifts towards tradable sidecars and secondary liquidity: McKinsey

Capital management in the life insurance sector is moving beyond balance sheet expansion to prioritise flexibility and investor alignment. However, while long-duration institutional capital remains the foundation, McKinsey & Company reports that leading platforms are now diversifying funding and exploring greater liquidity through mechanisms such as tradable sidecar interests.

In a recent article, consultants at McKinsey observed that over the past decade, the US life insurance industry has undergone a “profound transformation.”

“What began as opportunistic private-capital deployment into legacy annuity and life insurance blocks has evolved into a convergence of insurance carriers, alternative asset managers, and long-duration capital providers,” McKinsey said.

“At the center of this transformation is a self-reinforcing value creation model—often described as a “virtuous flywheel.” It aligns liability origination, differentiated asset management, flexible capital structures, and, increasingly, technology-enabled operating efficiency to drive growth and returns.

“This model has achieved significant scale and relevance over the past decade. Private-capital-backed insurers have scaled assets at rates exceeding 20 percent annually, with assets totaling nearly $1.5 trillion in 2025. These insurers are supported by more than $100 billion in capital across majority- or wholly owned onshore and offshore platforms and sidecars. The ability to pair predictable long-duration liabilities with higher-yielding private assets has created a powerful engine for balance sheet expansion and earnings growth for insurers.”

At the same time, McKinsey acknowledges that the way capital is deployed across the industry has also undergone major change in recent years.

Historically, the majority of new capital was invested directly into insurers themselves, whether it be through domestic insurance entities or affiliated offshore reinsurers designed to optimise capital efficiency.

However, since 2022, growth has begun to shift more towards alternative structures.

“More than 40 percent of new capital has flowed into sidecars, and an additional 10 percent has been deployed through minority investments and strategic partnerships. Sidecars enable insurers to access specialized investment capabilities without full ownership, while allowing asset managers to expand fee-based businesses supported by long-term insurance capital,” McKinsey said.

Adding: “Geographic strategies have diverged as platforms make trade-offs around scale, capital efficiency, and control. Newer and smaller carriers increasingly use different jurisdictions for offshore reinsurance. These smaller platforms have also retained more risk onshore, holding approximately 75 percent of liabilities domestically, compared with roughly 40 percent for the largest carriers. Larger platforms, by contrast, have continued to emphasize a mix of on-balance-sheet and capital-light models using offshore balance sheets and third-party capital to scale liabilities while generating fees for affiliated asset managers.”

This evolution toward flexibility and durability is also changing who provides the capital.

“While long-duration institutional capital remains foundational, leading platforms are diversifying funding sources (including selective engagement with smaller institutions and high-net-worth investors), refining on- and off-balance-sheet structures, and exploring greater liquidity through mechanisms such as tradable sidecar interests and secondary markets. Increasingly, capital strategy is being positioned not simply as a growth engine but also as a source of income stability, diversification, and downside resilience across cycles,” McKinsey explained.

In addition, consultants have also observed that an increasing elderly population, expanding retirement savings, and a heightened interest in reliable lifetime income are persistently contributing to the inflow of funds into life insurance and annuities. It is projected that individual annuity sales in the United States managed to surpass $450 billion in 2025, rising from $426 billion in 2024 and nearly doubling the figures from 2021.

In spite of these positive demand trends, returns continue to face ongoing pressure due to several factors. These factors include the rising costs associated with selling life insurance and annuities, the gradual tightening of investment margins, and the increasing difficulty in enhancing returns through capital efficiency.

“These pressures have intensified as more capital has entered the market. Since 2020, roughly 30 new private-capital-backed insurers and sidecars have launched, increasing competition for insurance liabilities and reducing the capital advantages that previously supported higher returns. So far, however, only a few sidecars have achieved scale,” McKinsey added.

Recall, that the outstanding market for collateralized reinsurance sidecar structures managed to grow by more than $5 billion in capacity terms over the course of full-year 2025, with casualty and non-catastrophe vehicles a key driver of sidecar market expansion, according to Aon Securities.

Given the proliferation of subscale sidecars, McKinsey emphasises that consolidation represents a meaningful opportunity to increase liabilities and improve operating efficiency. Looking globally, the firm notes that the UK pension risk transfer market, Japan, and mature Asian markets offer the next frontier for platforms with the appropriate risk appetite.