Regulators Continue to Scrutinize Private Equity Investments in Insurance

As innovative technologies continue to transform the insurance industry, private equity firms and venture capital funds continue to invest in promising insurtech startups and other licensed insurance entities. However, while the private investment landscape remains hot, regulators have become increasingly focused on the recent growth in private equity-owned insurers, and the National Association of Insurance Commissioners (“NAIC”) is continuing to evaluate the impact of this trend on the broader insurance industry.

For background, in December 2021, the NAIC’s Financial Stability Task Force voted to expose, for a 30-day public comment period, a draft list of “Regulatory Considerations Applicable (But Not Exclusive) to Private Equity (PE) Owned Insurers.” The draft list is available here and includes, among other things, the concerns that “regulators may not be obtaining clear pictures of risk due to holding companies structuring contractual agreements in a manner to avoid regulatory disclosures and requirements” and that “control considerations may exist with less than 10% ownership,” such as through “non-customary minority shareholder rights or covenants, investment managements agreement (IMA) provisions such as onerous or costly IMA termination provisions, or excessive control or discretion given over the investment strategy and its implementation.” The Financial Stability Task Force tapped its Macroprudential Working Group to coordinate the NAIC’s ongoing evaluation of these considerations. 

Fast forward to February 1, 2022, the NAIC’s Macroprudential Working Group held a virtual meeting, in which it reviewed public comments on the draft list and ultimately adopted an amended list for further consideration. The adopted list, as well as a summary of the Macroprudential Working Group’s meeting, is available here. Key considerations for private equity investors include, among others, that the NAIC will continue to evaluate control and conflict of interest considerations even where private equity firms may maintain less than the traditional 10% ownership interest in an insurance company, and that the NAIC is focused on assessing the operational, governance, and market conduct practices of private equity investors and analyzing whether any conceivable focus on short-term results may not be aligned with the long-term nature of many insurance products.

Notably, based on public comment, the amended list also specifically called out that “asset-management services may need to be distinguished from ownership when assessing and considering controls and conflicts” and that certain transactions “may be excluded by [existing] affiliate reporting due to nuanced technicalities,” such as “loans in a CLO issued by a corporation owned by a related party,” and that “regulatory disclosures may be required to identify underlying related party investments and/or collateral within structured security investments.”

While the NAIC’s focus on private equity investment is an area to monitor, the Macroprudential Working Group stressed that this is simply an exercise to finalize a list of considerations, “which has no bearing if any item on the list will be acted upon in the future.” Nonetheless, given the current draconian disclosure requirements for controlling investors in the insurance space, any potential expansion of these requirements should be followed closely and may cause some investors to back away from investment opportunities because of the potential for increased regulatory scrutiny.

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Goodwin’s Insurtech team, part of its globally ranked Fintech practice, advises startups, insurers, reinsurers, investors and others on the legal and regulatory challenges associated with creating, marketing, distributing and investing in innovative insurance products and companies. Goodwin provides clients with a full-stack insurtech offering, bringing together specialists from across the firm to provide forward-thinking counsel on strategic transactions, regulatory compliance and litigation matters.