Regulators and supervisors are facing new oversight challenges as life insurers deepen ties with nonbank financial institutions and expand their investments in alternative assets.
The interconnection between life insurers and nonbank financial institutions has notably increased since the 2008 financial crisis, according to Xiao Yuanqi, vice minister with China's National Financial Regulatory Administration.
Speaking at the Asian Insurance Forum 2025 this month in Hong Kong, Yuanqi said that investment assets for insurers in China have become closely linked with other nonbank financial entities, many of which operate outside the scope of regulatory supervision.
This trend is particularly evident in the expanding private credit market, where life insurers have become "important funding vehicles," according to Yuanqi. While private credit offers insurers more investment options and potentially higher returns, it also exposes them to greater credit risk. These assets are often associated with "complex structure[s], less transparency and lower ratings," Yuanqi said.
In its Global Insurance Market Report 2025, the International Association of Insurance Supervisors highlighted potential systemic risks associated with global life insurance's increasing allocation to alternative assets, particularly its growing exposure to private credit. The organization noted that these assets are "characterized by high levels of valuation uncertainty, illiquidity, complexity or a combination of these factors."
Life insurers' increased investments in "riskier and opaque assets" such as real estate and alternative credit instruments also poses risks to financial stability as these assets are difficult to value due to a lack of transparency and liquidity, the Bank for International Settlements said in an October report. Fire sales of these assets during economic stress could drain liquidity and worsen price swings, according to the organization.
Oversight evolution
While the shift toward alternative assets promises higher returns and improved asset-liability matching, supervisors and regulators must "get the monitoring right" amid rising concerns over liquidity, valuation opacity and systemic risk, said Dieter Hendrickx, chair of IAIS' macroprudential committee, at the forum.
The need for better regulation was echoed by Debasish Panda, chairman of the Insurance Regulatory and Development Authority of India, who emphasized the importance of regular thematic reviews, targeted data collection and scenario analysis to identify early risk buildup.
"Innovation and investment strategy must be matched by innovation in supervision, but always anchored in policyholder protection," Panda said.
Both Panda and Yuanqi advocated for stronger capital requirements and enhanced governance supervision of these assets.
"From a supervisory view, it is crucial to strengthen capital requirements and tighten large exposure limits. This helps prevent insurers from enhancing risk appetite blindly for short-term gains. It means a lot for asset safety," Yuanqi said.
Insurers must also do their part and ensure they have strong due diligence, governance and risk management practices for their investments in alternative assets.
"If you depend, for instance, on a third-party provider, make sure that you still have the in-house expertise to challenge the valuations that you get. It sounds very basic, but it's not always easy," Hendrickx said.
