Every year, Americans send hundreds of billions of dollars of retirement savings to life insurers in return for annuities that promise a future income. It’s an industry built on trust and prudence.
Recent headlines show those foundations are under threat. Insurers are taking on new kinds of risk, and regulators have fallen behind. Better oversight is essential for all concerned.
Federal investigators are digging into the latest episode. Two insurers controlled by Mark Walter’s TWG Global failed to disclose that more than $20 billion of their holdings were backed by companies under Walter’s control. Suddenly 42%, not 3%, of the insurers’ assets were revealed to be affiliated investments. To begin to unwind them, Walter quickly sold the Los Angeles Lakers for $12.5 billion.
Policyholders are so far unharmed, if perhaps startled to learn their retirement income was in any way tied to an NBA franchise.
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This specific case is unusual, but the vulnerabilities it reveals are not. Asset managers like Walter — as well as much bigger firms — have for years accelerated their growth by buying or linking with insurers, boosting sales of annuities and investing a growing portion of the proceeds in complex illiquid assets instead of traditional government and corporate bonds. By one estimate, a record 46% of insurers’ debt holdings were in private credit this year.
The Walter group episode shows one way this model can go wrong. Related-party transactions expose the firms and annuity holders alike to greater risk. Recent research shows that insurers owned by private equity firms bought most of their structured-security investments from affiliated entities, compared to less than 2% for other insurers. They buy securities from related parties that are harder to value, pay more for those assets than other buyers for the same investments and accept more risk. More than 40 insurers have 100% or more of their capital and surplus tied to affiliated entities.
This would be less of a problem if regulators were on top of it, imposing higher capital requirements on related-party transactions to reflect the added risk. They could also insist that insurers have stable long-term funding to ensure that losses or policyholder withdrawals don’t trigger a fire sale of assets.
But insurers have no federal oversight: They’re regulated by the states where they’re domiciled. Delaware’s last examination of Walter’s Delaware Life and Annuity Co., in 2023, didn’t spot misclassified affiliated investments. Tougher rules would help — but implementation and enforcement would still depend on state departments that are often small and sometimes overseen by elected officials with other priorities. Insurers, meanwhile, can choose to move assets to reinsurers in Bermuda and the Cayman Islands in search of more favorable regulatory treatment.
What’s to be done? Ideally, insurers — like big banks — would be under consistent federal supervision. Their growing role as lenders and entanglement with funds and banks mean that trouble at one or two big insurers could ripple across the financial system and economy, potentially requiring a federal bailout.
Imposing federal oversight won’t be easy. An earlier effort to designate a few large insurers as systemically important was successfully challenged in court. A plausible alternative would be to designate certain activities related to life insurance and annuity investments as systemically important, empowering the Federal Reserve or another national regulator to set and enforce uniform standards for disclosure, capital, liquidity and governance.
The companies won’t like that. But without reforms, competition is almost certain to drive ever-greater risk-taking — and, eventually, much worse headlines.
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