The European Insurance and Occupational Pensions Authority (EIOPA) has called for closer scrutiny of private equity-backed insurers, warning that complex ownership structures, investment strategies and governance arrangements can create additional risks for the sector.
In a new supervisory statement, EIOPA set out guidance for national supervisors on the authorisation and ongoing supervision of insurance and reinsurance undertakings linked to private equity (PE) firms. The aim is to promote a consistent, high-quality and risk-based approach across the European Union.
Private equity firms have become increasingly active in the insurance sector over the past decade. While EIOPA recognises that PE investment can bring benefits, it said supervisors must carefully assess the potential risks associated with the ownership model and the strategies adopted following an acquisition.
One key concern is the potential mismatch between the relatively short investment horizons of private equity firms and insurers’ long-term obligations to policyholders. Supervisors should ensure that insurers are not weakened by excessive shareholder distributions or other short-term measures that could threaten their long-term financial stability.
EIOPA also highlighted the complexity of financing and ownership structures commonly used in PE acquisitions. Transactions may involve significant debt, multiple holding companies and entities based in jurisdictions with different regulatory regimes. Supervisors are encouraged to scrutinise the full financing structure, understand the rationale for each level of ownership and test business plans against adverse financial scenarios.
Changes to insurers’ investment strategies are another area of focus. PE-backed insurers may increase their exposure to private credit and other alternative assets following an acquisition. These investments can be complex, illiquid and difficult to value. EIOPA also warned of potential conflicts of interest where insurance assets are used to support other businesses within the same PE group.
The authority has further raised concerns about the heavy use of reinsurance by some PE-backed insurers, particularly intra-group and third-country arrangements. While reinsurance can reduce capital requirements, EIOPA said supervisors should ensure that genuine risk transfer is achieved and consider potential increases in counterparty, liquidity and recapture risks.
Governance is also a key concern, given the significant influence that private equity general partners can exercise over portfolio companies. EIOPA said insurers must maintain effective governance arrangements and ensure management decisions remain independent and focused on the interests of policyholders and beneficiaries.
“Good supervision looks first and foremost at risks, not at who an insurer's owners are,” said Petra Hielkema, chair of EIOPA.
“Private equity-backed undertakings are subject to the same risk-based supervisory standards as any other insurer. But where new ownership structures or business models create increased complexity or additional risks, it is our responsibility to ensure those risks are properly supervised.”
EIOPA said the statement is intended to bring greater consistency to supervision as private equity-backed insurers become an increasingly important part of the European insurance market.
