The US Department of Labor (DOL) has concluded its review of the regulatory framework for the pension risk transfer (PRT) market and decided not to take any action at the moment, but it has left the door open for future rule changes.
At the end of June, the DOL’s Employee Benefits Security Administration (EBSA) issued a report to Congress on the thirty year old Interpretive Bulletin 95-1 (IB 95-1) in which it said it was not ‘prepared at this time to propose amendments’.
The EBSA report explicitly addressed concerns from some market participants that the greater use of illiquid investments, such as private debt, by non-traditional insurers (this group holds on average 50.3% of their portfolio in corporate bonds versus 64.1% at non-private equity backed firms) was risky.
“Some stakeholders attributed concerns about developments in these areas to private equity firms’ increased involvement in the industry.
They said that private equity-affiliated insurers tend to engage in riskier practices than traditional insurers. Stakeholders were also concerned that private equity firms do not have a long track record of managing life insurance obligations and may lack a commitment to policyholder interests,” the report said.
However, EBSA declined to propose amendments to IB 95-1 on the basis that the issues raised are ‘complex’ and said that a lack of consensus among stakeholders stymied potential action.
The EBSA report said that six advisory council members didn’t back any changes to the bulletin, while the other nine members supported different positions on different issues.
The report also looked at the increased use of reinsurance in the life insurance sector, noting that it had increased from less than $200bn in 1999 to $1.7trn in 2022. This quadrupled the share of life insurance obligations being reinsured from 6% to 24% of the total.
“A number of stakeholders raised concerns that life insurers are using reinsurance to move liabilities to less regulated reinsurers. They mentioned less stringent reserving requirements and accounting arbitrage as reasons for their concern,” the report said.
The EBSA report also specifically mentioned modified coinsurance – a variant of coinsurance which sees the cedent transfer only liabilities and keeps the assets on its books, while paying a portion of the interest from the retained assets to the reinsurer.
The report cited figures from AIRT Insurance Research which said that a total of $384bn was ceded under modified coinsurance contracts to foreign domiciled reinsurers in 2021, with 86 percent ($333 bn) of those reserves being sent to Bermuda.
It also noted that a 2023 study had demonstrated that private equity-backed firms are much more likely to utilise this type of reinsurance contract.
Despite acknowledging that stakeholders had raised concerns that modified coinsurance arrangements may provide insurers with an incentive – under existing risk based capital standards – to hold on to riskier assets longer than is optimal, the EBSA report said that no recommendations for changes had been made.
The report also said that a number of respondents had pushed back against the idea that offshore insurance was inherently riskier than keeping the assets and liabilities onshore in the US.
“While recognizing that the level of regulatory oversight of offshore reinsurance differs by jurisdiction, some stakeholders argued that Bermuda is well recognized as a credentialed international reinsurance jurisdiction,” the report said.
The report may have shied away from proposing changes to IB 95-1 currently, but it did not rule out making changes to the three decade old rule set in future. Instead EBSA will take further industry soundings, with a view to potentially taking action at a later date.
“Further exploration into developments in both the life insurance industry and in pension risk transfer practices is necessary to determine whether some of the [current regulations] need revision or supplementation and whether additional guidance should be developed,” the EBSA report said.
Assistant Secretary for Employee Benefits Security Lisa M. Gomez made similar comments in the press release which accompanied the report.
“We look forward to further exploration of the issues and concerns raised during the process, so that we can consider what next steps may be necessary to guide fiduciaries considering a pension risk transfer for their defined benefit pension plans, so that the fiduciaries can meet their obligations to participants and beneficiaries.”
