EIOPA sets EU-wide expectations for the supervision of private equity-backed insurers

The European Insurance and Occupational Pensions Authority (EIOPA) published today a supervisory statement on the authorization and ongoing supervision of private equity-related (re)insurance undertakings. The statement is addressed to national supervisors and aims to promote consistent, high-quality and risk-based supervision of private equity-backed undertakings across the Union.

Private equity (PE) firms have over the past decade shown a growing interest in acquiring and managing (re)insurance undertakings. While PE actors can bring potential benefits to the sector, their business strategies, ownership structures, asset allocations and governance arrangements can also pose challenges for effective supervision.

To support the appropriate supervision of PE-backed (re)insurers – both ahead of authorisation and on an ongoing basis thereafter – the supervisory statement highlights the key areas that supervisors should assess and closely monitor. These include:

• Mismatching investment horizons – PE firms often have short investment horizons that may not match insurers’ long-term obligations to policyholders. Supervisors must ensure that capital is not extracted from the undertaking in the form of high distributions to shareholders or other short-term measures that would negatively affect the long-term viability of undertakings and ultimately put policyholders and beneficiaries at risk.
• Complex financing and ownership structures: PE acquisitions often use significant debt and involve several entities and multiple holding companies, some of which may be located in countries with non-equivalent regulatory regimes. Unnecessarily complex ownership structures can impede regulatory oversight. Before authorising the acquisition, supervisors are therefore advised to scrutinise the entire financing structure, request justifications for each level of ownership and test business plans against adverse financial scenarios.
• Business model changes: PE-backed insurers often increase their allocations to private credit and alternative assets following an acquisition. These assets tend to be complex, illiquid and difficult to value. In some cases, the assets of insurance undertakings are used to support other affiliated businesses within the same PE group, leading to concentration risks and conflicts of interest. High leverage, cost-reduction strategies and balance sheet optimisation are also commonly used. Supervisors should assess whether, and to what extent, such practices remain consistent with the prudent person principle and a sound management of the business.
• Heavy reliance on reinsurance: EIOPA has noted a strong dependence on reinsurance among PE-backed undertakings, often through intra-group and third-country reinsurance arrangements. The reduction in capital requirements that these measures entail is only partially offset by a higher capital charge for counterparty default risk. Supervisors should pay particular attention to the effective risk transfer of such arrangements and take potential increases in counterparty, liquidity and recapture risks into account.
• Governance issues and conflicts of interest: In PE, general partners often exercise significant direct or indirect control over the management of their portfolio companies. To ensure that the management decisions of the insurance undertaking remain independent and that decisions are made in the best interest of policyholders and beneficiaries, supervisors should ensure that undertakings continue to have a sound and effective system of governance.

Petra Hielkema, Chair of EIOPA, said: “Good supervision looks first and foremost at risks, not at who an insurer’s owners are. 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. This statement helps bring greater consistency to that approach across the EU as private equity-backed insurers become an increasingly important part of the European insurance market.”

Go to the Supervisory Statement