The transformation of the life insurance industry: systemic risks and policy challenges

The life insurance industry has undergone a profound structural transformation since the Great Financial Crisis, amid a prolonged period of exceptionally low interest rates and evolving regulatory frameworks. This paper examines the systemic risks and policy challenges emerging from this transformation, with a particular focus on the growing involvement of private equity firms, the shift in investment strategies towards riskier and opaque assets, increased use of derivatives and greater reliance on asset-intensive reinsurance, often through offshore jurisdictions. Standard risk metrics indicate that the sector's systemic importance has risen, notably in the Americas and Asia, due to heightened interconnectedness with the broader financial system. Liquidity risks have become more pronounced, stemming from greater use of short-term funding, policy surrenders, and margin calls on derivatives, while governance complexities and opacity in asset valuation further complicate supervision. Several measures could be considered to address these challenges, such as enhancing supervisory frameworks and disclosures, prudential charges to mitigate concentration risk and liquidity risk, harmonisation of international standards and complementing supervision with a macroprudential perspective to monitor and address concentration risks and financial interlinkages at the system level. Ultimately, while the sector has demonstrated adaptability, its growing complexity and interconnectedness highlights the need for vigilant regulation to safeguard financial stability and preserve the sector's critical role in the financial system.