The European Insurance and Occupational Pensions Authority (EIOPA) has turned its head towards the almost zeitgeist topic of ‘private equity’ ownership of life insurers. On 3rd February, it published ‘Consultation on supervisory statement on the authorisation and ongoing supervision of (re-)insurance undertakings related to private equity’, a new consultation paper that is “seeking to address the risks and ensure high-quality and convergent supervision of (re-)insurance undertakings related to private equity firms, considering their specific nature and risks.”
While not being a Supervisory Statement as yet, this Consultation Paper could be seen as a new ‘manual of expectations’ for national regulators. The document covers four main areas: the PE firm’s acquisition strategy and business model; governance and conflicts of interest; prudential aspects; and leverage.
According to Luca Tres, Head of Strategic Risk and Capital Life Solutions, EMEA at Guy Carpenter, the paper connects to prior efforts.
“There is ‘fil rouge’ here. This is an EIOPA supervisory trajectory that started with their work on run-off in 2022 and 2023. There the authority had already pointed to the growing financial investors’ role in the industry and the potential implications. The current document continues that work,” he said.
“Anything EIOPA touches on this document is not new. It is already the common supervisory practice in a number of jurisdictions. The real focus here seems to be convergence across supervisory practices.”
The use of private credit and other alternative assets by PE-backed insurers gets a mention in the consultation. This has been a bone of contention in the US in the past few years with regards to the pension risk transfer market as class action lawsuits claiming that some plan sponsors do not select the ‘safest annuity available’ (as mandated by ERISA) for their de-risking partner.
The UK regulator the Prudential Regulation Authority has also weighed in on the topic, making a few comments relating to its concerns about the prevalence of the use of funded reinsurance to reinsure bulk purchase annuity liabilities.
Therefore, it is perhaps of little surprise that EIOPA also has a view but according to Tres, the debate isn’t about the assets themselves.
“Private assets are not inherently good or bad, but they can be riskier when governance and investment capabilities are not sophisticated enough,” he said.
The requirement for adequate expertise in asset management is not necessarily a new one per se – Article 132 of the existing Solvency II regulations is the ‘prudent person principle’. And indeed, other notable takeaways from EIOPA’s consultation appear to be reminders and/or variations on an existing requirement.
Among these is EIOPA’s suggestion that an acquiring PE firm submit a three-year business plan to the national regulators so that they can “assess how the future business model of the undertaking will allow it to comply with the prudential requirements laid down in Article 59(1)(d) of the Solvency II Directive, especially if undertakings’ revenues and/or solvency position is expected to be optimized.”
EIOPA’s paper also says that if the information provided is not considered sufficient, national regulators might want to think about requiring the minutes of the PE investment committee or the Board that has decided on the acquisition.
This might sound intrusive on the surface, but again, Solvency II’s Own Risk and Solvency Assessment (ORSA) already requires forward-looking, multi-year business/solvency projections.
“EIOPA is not building a PE-specific regulatory regime here. What it is doing is aligning insurance supervision with how sophisticated M&A and financial supervision is already conducted in some jurisdictions and, as discussed, standardising it across member states,” said Tres.
“It is worth reminding that the regulatory convergence topic across member states and their supervisory authorities is surely a key priority for EIOPA. This document is part of that trajectory,” he added.
The consultation paper covers other topics, of course. Governance and conflicts of interest being another significant one (where EIOPA wants to ensure that asset management decisions remain independent, for example) and comments on leverage, capital enhancements and financing (EIOPA requires stress testing of debt repayment, scrutiny of liens/pledges, tailored reporting, and ORSA scenarios to protect solvency and liquidity).
Responses to EIOPA’s consultation are due at the end of April and it would not be a surprise if responses are plentiful. But for Tres, if you dispassionately look at the paper, it’s not anti-private equity.
“This is not a compatibility issue. EIOPA isn’t saying that private equity funds and other asset managers can’t be players in this market. EIOPA’s guidance reads more like a supervisory reminder: where ownership structures are complex or incentives could favour value extraction over resilience, supervisors should increase scrutiny. It’s essentially a nudge — perhaps amplified because the issue is topical,” he said.
EIOPA had not replied to the offer to provide a comment prior to publication.
