Insurers and private capital firms strengthen ties

Private-capital-backed insurers have gathered nearly $700b in assets through 2023.

Private capital firms and insurers have developed a mutually beneficial relationship in the past decade. Insurers have benefited by selling or reinsuring legacy books to improve return on equity (ROE) and free up capital, a McKinsey & Co. insight said.

This relationship has led to more than $31b of net new private capital entering the life and annuities industry since 2014, while publicly traded insurers have returned approximately $175b to shareholders.

The insight by Andrew Reich and Ramnath Balasubramanian with Henri Torbey and Ying Zhao indicated that leading insurers, especially those backed by private-capital firms, use a self-reinforcing "flywheel" approach, which combines large-scale issuance of insurance policies, differentiated investment management, and capital management flexibility to support growth. 

This approach comprises:

• Issuance of Policies and Annuities at Scale: Building scale and predictability in policy issuance to ensure sufficient funds for investment.
• Differentiated Investment Management: Generating higher yields through private assets while managing risks to increase earnings and reinvest into better policy pricing.
• Capital Management: Expanding capital flexibility by accessing third-party capital and optimising ownership structures and jurisdictions.

Insurers backed by private capital firms have gathered nearly $700b in assets through 2023, commanding a 13% market share in the insurance industry, up from 1% in 2012.

Japan and the UK offer significant opportunities for private capital firms and insurers, with potential reserves of $600b in Japan and $200b in the UK.

The flywheel strategy comes with risks, including credit and liquidity risks. Regulatory scrutiny is increasing due to concerns about potential defaults spreading to other parts of the financial system. Effective risk management, asset liability matching, and robust credit monitoring are essential.