Over the past decade, insurers and private capital firms have cultivated a symbiotic relationship, yielding significant benefits for both parties. According to insights from McKinsey & Co., insurers have strategically offloaded or reinsured legacy portfolios, enhancing their return on equity (ROE) and unlocking capital reserves.
This strategic collaboration has injected more than $31 billion of net new private capital into the life and annuities sector since 2014. Concurrently, publicly traded insurers have returned approximately $175 billion to shareholders, reflecting a robust financial environment.
Andrew Reich, Ramnath Balasubramanian, Henri Torbey, and Ying Zhao underscored the role of private-capital-backed insurers in pioneering a self-reinforcing “flywheel” strategy. This approach integrates large-scale issuance of insurance policies, specialized investment management, and flexible capital deployment to drive sustained growth.
Key components of this strategy include:
- Scale in Policy Issuance: Ensuring predictability and ample capital for investment through extensive policy issuance.
- Differentiated Investment Management: Leveraging private assets to achieve higher yields while effectively managing risks to bolster earnings and refine policy pricing.
- Capital Flexibility: Enhancing operational agility by accessing external capital and optimizing ownership structures across various jurisdictions.
Insurers backed by private capital have amassed nearly $700 billion in assets by 2023, marking a substantial market share increase from 1% in 2012 to 13% currently. Notably, Japan and the UK emerge as pivotal markets, offering potential reserves of $600 billion and $200 billion, respectively, further fueling growth prospects.
Despite its merits, the flywheel strategy carries inherent risks, including credit and liquidity concerns. Heightened regulatory scrutiny underscores the need for robust risk management practices, asset-liability alignment, and vigilant credit monitoring to mitigate systemic financial risks.
