US insurance companies owned by private equity firms have come under scrutiny in the past year for channelling customer money towards higher-yielding but riskier investments, with loans and private debt assets partially replacing traditional, more vanilla options such as government bonds. Regulators across the pond worry that this creates a liquidity risk for insurers, especially if the market were to lose confidence in the value of private debt assets.
In the UK, insurers will also shortly be allowed to introduce more diversification into their portfolios. Stephen Lowe, communications director at Just Group, notes that new regulations due to come into force towards the end of 2024 should give them more flexibility to invest in a wider range of assets, for example within the infrastructure sector. But a US-style scenario as outlined above is unlikely given how strictly insurance providers are regulated in the UK, he says.
Be as it may, it is an issue for the regulator to keep an eye on, as FT writer Camilla Palladino recently pointed out. And given that a key attraction of annuities, to take one example, is the fact that they provide a guaranteed, safe income, investors might legitimately wonder what would happen if the worst-case scenario materialised.