A supervisory statement on private equity-backed insurers comes from the European Insurance and Occupational Pensions Authority (EIOPA). The document concerns the authorization and ongoing supervision of private equity-related (re)insurance undertakings and is addressed to national supervisors.
What the Statement Covers and Who It Addresses
As EIOPA’s announcement describes it, the statement aims to promote consistent, high-quality and risk-based supervision of private equity-backed undertakings across the Union.
On private equity (PE), EIOPA says that PE actors can bring potential benefits to the sector, while their business strategies, ownership structures, asset allocations and governance arrangements can also pose challenges for effective supervision.
To support supervision of PE-backed (re)insurers both ahead of authorisation and on an ongoing basis thereafter, the statement highlights the key areas that supervisors should assess and closely monitor.
Distributions, Debt and Layered Holding Structures
On capital, EIOPA says that supervisors must ensure that capital is not extracted from the undertaking in the form of high distributions to shareholders or other short-term measures. Such measures are described as ones that would negatively affect the long-term viability of undertakings and ultimately put policyholders and beneficiaries at risk.
On financing, EIOPA says that PE acquisitions often use significant debt and involve several entities and multiple holding companies, some of which may be located in countries with non-equivalent regulatory regimes. EIOPA also says: “Unnecessarily complex ownership structures can impede regulatory oversight.”
For the period before an acquisition is authorised, EIOPA says supervisors are advised to scrutinise the entire financing structure, request justifications for each level of ownership and test business plans against adverse financial scenarios.
For readers who follow private-equity ownership deals in insurance, InsuraBeat has separate coverage of a private equity take-private deal in insurance.
Asset Allocation and Affiliated Businesses
On investment choices, EIOPA says that PE-backed insurers often increase their allocations to private credit and alternative assets following an acquisition.
EIOPA also points to cases in which the assets of insurance undertakings are used to support other affiliated businesses within the same PE group, leading to concentration risks and conflicts of interest. It also says: “High leverage, cost-reduction strategies and balance sheet optimisation are also commonly used.” In the same passage on business model changes, EIOPA says supervisors should assess whether, and to what extent, such practices remain consistent with the prudent person principle and a sound management of the business.
For readers who follow insurers’ private-asset holdings in the EEA, InsuraBeat has separate coverage of EIOPA’s data on private assets held by EEA insurers.
For readers who follow European supervisors’ warnings on private credit, InsuraBeat has separate coverage of the European supervisors’ recent warnings on private credit growth.
Reinsurance Dependence and Risk Transfer
In the announcement, EIOPA has noted a strong dependence on reinsurance among PE-backed undertakings, with that dependence often through intra-group and third-country reinsurance arrangements.
EIOPA also says supervisors should pay particular attention to the effective risk transfer of such arrangements and take potential increases in counterparty, liquidity and recapture risks into account.
Governance, Independence and the EIOPA Chair’s Message
On governance, EIOPA notes that in PE, general partners often exercise significant direct or indirect control over the management of their portfolio companies.
EIOPA says in its release that, to ensure the management decisions of the insurance undertaking remain independent and that decisions are made in the best interest of policyholders and beneficiaries, supervisors should ensure that undertakings continue to have a sound and effective system of governance.
Petra Hielkema, EIOPA Chair, said: “Good supervision looks first and foremost at risks, not at who an insurer’s owners are.”
She also said: “Private equity-backed undertakings are subject to the same risk-based supervisory standards as any other insurer.”
