In a January 4th Wall Street Journal article “private equity’s move into insurance provokes systemic-risk concerns,” It stated that the Treasury and IMF says those investments warrant greater monitoring for possible threat to the financial system, and the Fed says that the PE owned insurance company could pose systemic risk to the financial system.
To me, the success or failure associated with the insurance business is not just about the ownership model, it is about whether there is a solid ALM framework and process guiding the product design, asset allocation and asset management decisions. If the objective is to run a successful long term insurance business guided by a solid ALM process, with the focus on the paying insurance benefits on a timely fashion, the risk is minimal. However, if a firm is trying to use insurance assets as a “cheap source of funding” with the objective of hitting a “return target” for its PE investors, the safety and security of the policy holders could potentially be compromised.
I have had several discussions with PE firms and insurance professionals in the past few months, and I was pleasantly surprised that some large PE firms have been very focused on setting up an ALM framework and corresponding asset allocation processes and started building such capabilities.
With the interest of PE firms on insurance assets unabated, I suggest that:
-PE forms should create a solid, stand-alone ALM function, establish a sound ALM framework, and develop a SAA philosophy and actionable SAA process,
-Insurers and asset managers should put policy holders’ long-term interest ahead of the short-term return target to ensure the long-term success of the insurance business, regardless of the types of companies and ownership models. This will in turn benefit both the policy holders and investors in the long run.
-Regulators should focus on the ALM framework, process and capabilities of insurance companies and insurance asset managers in product design, strategic asset allocation decisions and asset management processes. This is potentially more important for PE firms and other asset managers trying to get into the insurance asset management business.
