The European Insurance and Occupational Pensions Authority (EIOPA), the EU body responsible for supporting effective and consistent supervision of insurance and occupational pensions, has issued new guidance on the authorisation and ongoing supervision of re/insurance undertakings with links to private equity.
In its supervisory statement, EIOPA sets out areas it believes national supervisory authorities should consider when assessing private equity-backed insurers and reinsurers.
The statement is intended to encourage a consistent, risk-based approach across the European Union, covering both the assessment of proposed acquisitions and the subsequent supervision of affected undertakings.
EIOPA said private equity firms have become increasingly active in the insurance sector over the past decade, including through the acquisition and management of re/insurance businesses.
While the authority recognises that private equity investment can offer benefits, it also points to potential supervisory challenges arising from the ownership structures, investment strategies, financing arrangements and governance models that can accompany such transactions.
One of the issues identified by EIOPA is the potential difference between the investment timeframe of private equity owners and the long-term commitments held by insurers. The authority said supervisors should consider whether pressure to generate returns or distribute capital could affect an insurer’s ability to meet its obligations over the longer term.
In particular, supervisors are expected to consider whether shareholder distributions or other measures could weaken an undertaking’s financial position and increase risks for policyholders and beneficiaries.
EIOPA has also highlighted the financing and ownership structures commonly associated with private equity transactions. Acquisitions may involve substantial borrowing, multiple corporate entities and several layers of ownership, including companies established in jurisdictions where regulatory requirements differ from those within the EU.
According to EIOPA, unnecessarily complicated structures can make it more difficult for supervisors to obtain a clear view of an undertaking’s financial position and risks. Supervisors should therefore examine the complete financing arrangement, understand the purpose of each ownership layer and assess proposed business plans against adverse financial conditions before approving an acquisition.
Changes to investment strategies following a private equity acquisition are another area of focus for EIOPA. The authority said private equity-backed insurers may increase their exposure to private credit and other alternative investments after a change in ownership.
Such investments can involve greater complexity, limited liquidity and challenges in establishing reliable valuations. EIOPA also pointed to circumstances where insurance assets may be used to support other companies within the same private equity group, potentially creating conflicts of interest or concentrations of risk.
The authority said supervisors should consider these practices alongside the use of leverage, cost-cutting measures and balance-sheet optimisation. EIOPA expects supervisors to assess whether such approaches are compatible with the prudent person principle and with the sound and prudent management of the insurance undertaking.
Reinsurance arrangements are another area highlighted by EIOPA. The authority said private equity-backed insurers can have significant reliance on reinsurance, including arrangements involving related companies within the same group and reinsurers based outside the EU. Although reinsurance can reduce an insurer’s capital requirements, EIOPA noted that this may also introduce other exposures, including counterparty, liquidity and recapture risks.
EIOPA therefore expects supervisors to assess whether reinsurance arrangements result in an effective transfer of risk rather than focusing solely on their impact on capital requirements. The authority said supervisors should also take account of the potential for other risks to increase as a result of these arrangements.
Governance is also a key consideration in EIOPA’s statement. Private equity general partners can have significant direct or indirect influence over the businesses in which they invest. EIOPA said supervisors should consequently pay close attention to whether an insurance undertaking retains appropriate independence in its decision-making and whether its governance arrangements remain effective.
The authority expects the management and governance of private equity-backed insurers to remain focused on the interests of policyholders and beneficiaries, while maintaining appropriate controls over potential conflicts of interest.
EIOPA Chair Petra Hielkema commented: “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.”
EIOPA said the statement is not intended to establish a separate supervisory framework for insurers owned by private equity firms. Instead, it provides national supervisors with a common set of considerations for identifying and assessing risks that may arise from particular ownership structures, investment strategies, financing models and governance arrangements.
The statement forms part of EIOPA’s broader work to promote consistent supervisory practices across the European insurance market as private equity participation in the sector continues to develop.
