Trends in US Insurers’ Ownership Structure and the Evolving Regulatory Landscape with Virginia Commissioner of Insurance and Secretary Treasurer of the NAIC Scott White and Amnon Levy, CEO of Bridgeway Analytics

Commissioner White Photo

Stewart: Welcome to another edition of the podcast. I am Stewart Foley, I’ll be your host. Everybody’s been asking us to have a regulator on, and we finally have one. Today I’m thrilled to be bringing you a very good topic, and a great panel on our podcast. The topic of conversation is ‘trends in US insurers’ ownership structure, in the evolving regulatory landscape.’ And I’m joined today by two very special guests. Scott White is the Virginia Commissioner of Insurance and the Secretary Treasurer of the NAIC. He is also a member of the IAIS Macro Prudential Committee. He’s served as the chair of the NAIC’s financial conditions committed from 2020 and 2022. Scott, welcome, we’re thrilled to have you on.

Scott: Well, thanks Stewart and it’s great to be here, I’ve listened to a few of your podcasts, so it’s finally great to be here and have this conversation with you. And join the dialogue.

Stewart: Thanks so much. And we’re also joined by, I have coined you the regulatory savant, Amnon, I don’t think that’s a name you gave yourself, but that’s all good. Amnon Levy, founder of Bridgeway Analytics. Bridgeway Analytics supports the insurance and investment community, and the regulatory community, navigating a complex set of rules and regs. Amnon has developed award-winning quantitative solutions actively used by over 200 financial institutions and their regulators, including the 2021 redesign of the NAIC C1 bond factors. Amnon, welcome back, it’s always great to see you, man.

Amnon: Always a pleasure, Stew, thank you for having me.

Stewart: So, the US insurance regulatory landscape is experiencing broad changes. There’s noticeable shifts in ownership structure that have resulted in changing conditions in investment markets in the financial services industry. I am not the guy to talk about this, so would one of you please set the stage for how the landscape has changed?

Amnon: Sure, Stew, let me start off, of course, I’m going to be very keen to hear Scott’s perspectives on this, coming out of a regulator who not only helps oversee the guidelines in the US, but is also actively in discussions with international rule-making bodies. But really there have been two noticeable shifts in the industry that came with the global financial crisis. Shifts in investment strategy, something that we talked about numerous times on your show, the low yield environment has insurance investment strategy move more heavily towards higher yielding alternative assets, such as private placements and structured products. And we also saw investments access to lower cost, efficient investment vehicles. We’ve talked about feeder funds and those sorts of vehicles that insurers have found are particularly useful in supporting the policy blocks.

Now, coupled with a shift in investment strategy, we also saw a shift in ownership structure. The investment strategy of where insurers are investing in alternatives, was coupled with asset managers that were proficient in originating those assets, taking ownership stakes in those insurers, effectively helping them invest in assets that were really higher yielding, and that business strategy seemed to have worked incredibly well for them over the last 10+ years.

Stewart: And I want to bring you in, Scott. I want to ask the ice-breakers questions that we ask everybody, right, so what’s your hometown, where’d you grow up? What was your first job? And throw in a fun fact before we dive into the regulatory things.

Scott: Well, yeah, absolutely Stewart. So I grew up in Missouri, like yourself actually. This was our common bond. And went to the University of Missouri law school; from there I practiced in St. Louis, before moving back to Richmond, Virginia, where I spent the latter half of my adolescence and met my wife, so we moved back to Richmond. And I’ve spent most of my career working for this agency, whether in the legal office or now as commissioner, which has been a very rewarding career. Particularly in the last few years, with all the issues swirling around, it’s very challenging, but also very rewarding.

Stewart: And what was the first job, not the fancy one?

Scott: We had, I don’t know if you all have Friendly Ice-Cream restaurants out there, I worked as what we called, it wasn’t a dishwasher, it was a Sewer Rat. That was the official job title I had to put on my law school application when they were doing the background check.

Stewart: That’s awesome.

Scott: I had a lot of questions about that, but that’s what I was.

Stewart: That’s great, and the fun fact is, yeah, you and are both, we both have Missouri roots.

Scott: Go Tigers.

Stewart: Were regulators tracking these changes, Scott, that Amnon was outlining?

Scott: Absolutely. So, Amnon was focusing on two components of that, investment strategy and ownership structure. I would say the NAIC started looking at the ownership structure side of it all the way back in 2013 or ’14 when we began to notice these changes. And then more recently with the investment strategy, this push for a higher yield because of the low-interest rate environment is something that we began to monitor. Not just the NAIC, Stewart, you also had Congress, you had the Treasury, and international rule-making bodies were also sitting up and taking notice. What we did at the NAIC through our Macro Prudential Working Group, was to initiate a really broad review of these changing ownership and investment trends. Now we were focused on materiality, but we started our efforts to refine the rules and have them better aligned with the changing environment.

And I put those into three different categories of what we focused on. Now the first classification and treatment of concepts. And here, it really deals with the level of ownership and what constitutes control in the broader set of related party relationships that we think should be considered in the context of investments. A broader way of looking at this. And also, a move towards a principles-based bond definition when classifying assets. It might receive more favorable treatment, so you might have, for example, a bond that has more features of equity characteristics. So, we want to make sure that that’s captured appropriately. So that’s one piece of it. And then heightened disclosure is also a very important component. And we’re focused on affiliated and related party investments, and also insurer’s investments more broadly.

And then the final piece is our risk-based capital framework and making sure that there’s the appropriate level of allocation across investments. And we’ve been focused in particular on two things. First is structured products, like CLOs, and the tranches within those, and then investment vehicles such as feeder funds.

Stewart: And so can you talk a little bit about… And I’m just following our outline here, how material these changes have been?

Amnon: Speaking to some of the various segments in the industry, the changes are pretty substantial. My perspective is this is probably the broadest change on the investment side since the RBC framework was rolled out. The effort to classify a bond, that’s pretty big, and you see quite a bit of interest in understanding what the implications will be, and it’s going to take the industry and regulators quite a while to work through principle-based approaches that by their very nature are based on precedents. And that’s something that, I think, we’ll need to work across various stakeholders, between the regulators, the asset managers, the insurers, and so forth.

Now, one of the things that I did want to touch on that I think often gets overlooked is how relevant some of these changes are to the broader industry. So, for ownership structure, for example, when you think about the alternative asset managers that now have ownership stakes in insurers, clearly the rules that Scott was referencing related to affiliates and the like, and heightened disclosure related to related party investments and such, obviously there’s going to be a material impact there. But when you think about asset managers that are not in the business of investing in insurers, there are also important implications. And truly there’s the heightened disclosure aspect associated with it, where they’ll likely need to provide support to their insurance clients, disclosing what the insurers are investing in, but there are more subtle issues for the broader industry to keep an eye on.

And it’s really the interplay between regulation and insurer strategy, and the downstream effects when you’re looking at the impact of changes and rules that govern trillions of dollars in assets, there’s going to be a shift in capital markets ultimately as insurers shift their governance frameworks and investment strategies, to align with the new regulatory landscape. And often what you see is industries really react in a very cautious manner when regulators suggest heightened levels of disclosure and often are concerned about the burdensome nature of the disclosure, and sometimes for good reason. CCAR was rolled out, which was a very costly effort. Might be worth it, but nonetheless, it has to be acknowledged that those disclosures and those analyses are costly. But often, it’s also coupled with a market opportunity, whether the heightened level of disclosure or standardization is driven by regulatory or market trends. There can be very positive implications. A great example is the success of CLO 2.0s. The standardization post-financial crisis. That was part of the reason that asset class really flourished. The transparency allowed institutions to feel more comfortable with those investments. So, it’s important for the broader industry, and the broader set of investment managers to better understand the downstream implications and opportunities associated with some of the changes.

Stewart: Thanks, Amnon, so what are the regulatory concerns, Scott, when you’re talking about shifting industry ownership and shifting investment trends?

Scott: Right, well, I’d start by saying, Stewart, that regulators, we generally don’t regulate hypothetical practice. When we notice something emerge in the markets, there’s always a continuous process of evaluating the environment, making sure the rules are appropriate for what we’re observing. And the other thing is we take a very balanced approach, or at least we try to, in terms of also looking at implications for cost associated with any compliance burdens that may result, talking about for example, complex regulations, or what the implications might be for competition. And it can be humbling when you’re looking at trying to get on top of some of these issues in terms of the practice and appropriateness of rules and how they’re designed. Sometimes the materiality of the trend can be mis-estimated.

And all I would point to is a recent dramatic example with Silicon Valley Bank being placed under receivership. What you had in that situation was a rising interest rate environment that resulted in mounting losses, the bank had taken on long-duration fixed income assets, and not just Silicon Valley, other banks, and these began accumulating during the COVID-era. And you combine that with the fact that it doesn’t look like the bank had proper oversight and governance in place, and that’s what resulted. So it’s always a useful reminder and helpful to do… Remember to pause at times, review our practices when we see industries trending into these types of uncharted areas. And again, it’s not confined to Silicon Valley or the banking industry. We always talk about what happened in the late 1980s where you had over 175 or so life and health companies become insolvent, and it really revealed a regulatory issue at the time this approach of fixed capital standards. And it led to the development of our current risk-based capital framework that we rolled out shortly thereafter in the early ’90s. Really we realized there were problems with the fixed capital standard, it didn’t address variations in fundamental risk, whether it’s across sectors or companies, we had a framework where every company was required to hold the same minimum amount of capital, without taking into account financial conditions, size, risk profile. So where we are today is we look at primary line of business, and also characteristics. Again, we focus on an insurer’s size, but also the inherent riskiness of his financial assets and operations.

Stewart: That’s very helpful. And Amnon, how is access to alternative assets improved with the changes in ownership structure?

Amnon: Right, I touched on that a little bit in the intro, but by their very nature, alternative investment opportunities require an understanding of nuances that are not standard. And as a corollary to that, the expertise and the controls that are needed to manage those investments, especially for highly regulated and complex financial intermediaries, can’t be easily outsourced, and while insurers generally have access to alternatives, and you see traditional life companies for example, investing in alternatives, there is a benefit to having an alternative asset manager effectively taking an equity stake, and a first loss stake effectively, in an insurer. And then providing that channel for investments in assets that otherwise would be more difficult to manage. Now, as with other aspects related to optimal organization structure, there’s always a balance between aligning functions that are best managed internally, and those that are outsourced.

And it ultimately is determined by factors such as cost incentives and information flow. In the case of PE-owned, or private-equity-owned insurers, I think what’s been demonstrated over the last 10 or so years is that there is a real symbiotic opportunity here, but it certainly needs to be managed appropriately. You need to have the appropriate governance in place, and as Scott pointed out, as the industry shifted regulators in NAIC and other rule-making bodies realized that the rules needed to be updated to accommodate the new landscape.

Stewart: And Scott, one of the things I’d love to tell you that I was brilliant enough to come up with, but is actually I learned this from listening to the two of you discuss it, and this is my own opinion, but one reason regulatory oversight is important, the primary reason is to protect the policyholder. And when there’s a claim filed that the insurance company can pay that claim, and in the event that an insurance company gets itself into trouble, the regulator can limit the amount of dividends that that company pays out as a way to conserve that company’s resources.

However, when you have investment management-owned insurance companies, sometimes there are fees that are being paid from the insurance company to the owner that is tantamount to dividends, but not necessarily under the same regulatory purview. Can you talk about that concern for regulators and how that shakes out?


Scott: Yes, certainly, and certainly you hit on a big issue. Now, Amnon did a great job of describing of the benefit of these ownership and related party investments where incentives are aligned, but it does raise a unique set of regulatory concerns in this context, when you have this investment management. So I would point to three different areas, and you touched on one of them. You have transparency around undisclosed management fees, do we even know what these fees are, regardless of how much they are? And then that ties into fairness, how do they compare to the market standard for management fees? And then potential conflicts of interest, where you might have a certain bias that exists to overweight investments, that the manager can source with other elements that are difficult to define.

So, let’s talk about the investment management fee structure. That can lead to a lot of different problems with payments. It might be viewed, as you said, as unauthorized dividends, so we regulate this space of dividends, but we can’t use a lever when it comes to management fees, if you have a situation where you need to recapitalize a troubled company for example, in the same way you could with dividends.

We put certain things in place in one of our task forces at the NAIC, we have a new test, an asset adequacy test. It’s going to require disclosure of these management fees, and it’s going to give us a much better sense of what the materiality of it is when we assess the solvency of these companies.

Stewart: And what about, I guess, for either of you, what about risk sharing and proper governance? Which are critical and not limited strictly to PE relationships?

Amnon: That’s a really interesting point, Stew. And something that I really want to reinforce is the observation that these issues are not specific to private-equity-backed or alternative asset-manager-owned insurance companies. The issues related to aligning incentives are as old as asset management. Even going back to the financial crisis we saw thoughtful approaches to governance and risk sharing at AIG being recapitalized, as an example. If you recall, in that case, there were two LLCs that were formed, Maiden Lane II and Maiden Lane III, that were designed in a way that required AIG to retain a subordinative portion of the two LLCs. And effectively became a related party to the bailout risk, right?

Now, the structuring of these assets in this way and the deliberate sharing of risk, ultimately allowed AIG to remain an operating company, and for the Federal government to recover its investments. When you think about how that played out, and you think about how you structure a relationship between an investment manager and an insurer in the context of an arm’s length relationship, or in the context of an insurer that’s owned by the asset manager, you want to be deliberate and transparent with how that relationship is structured in terms of the fee and incentives.

And that’s something that I think is critical. You don’t want to narrow how you think about the problem to only be relevant to PE, and in that regard, the broader industry should remain aware of the issues. Because ultimately regulators are going to effectively extrapolate what they’ve learned from working with better designed rules, given the new ownership structure landscape, if you would. And then they’re going to look at other parts of the industry and possibly extrapolate. Think about how investment management relationships that might be more traditional, whether they are adhering to a new heightened standards. So a lot to think about in terms of how broadly relevant these trends, and these changes to the guidelines are.

Stewart: Thanks, Amnon. That’s very helpful. So, Scott what changes has the NAIC rolled out to address their concerns?

Scott: Thanks Stewart, that’s a great question. And I do want to emphasize the broader point Amnon made in terms of our activities-based approach to looking at these issues. We talked a lot in this podcast so far about the need for transparency and heightened reporting requirements. We have rolled those out for affiliate and related party investments. And again, this relates to notions relating to control, it can possibly lead to these conflict of interests and the problems that can develop from that.

So, what are we talking about here? What constitutes control? We’re looking at it more broadly than we typically do, which is mostly or usually associated with 10% ownership. Now, it’s considered to require a broader set of relationships, references a related party. So, we’re emphasizing, New York it is Circular for example, and what they came out with is a relationship can arise from a contract or other factors, and not necessarily tied to ownership of voting securities of insurers. And we think that’s right.

The other thing I would point to, again, there’s a lot of work, we have 13 different regulatory considerations, but and one of our capital task forces, we’ve made changes to enhance the accuracy and uniformity of RBC calculations. And again, focused on affiliated investments in all insurance sectors. The final thing I would mention in terms of focusing on efforts to improve transparency, I mentioned this asset adequacy testing. That’s very important, and we think it’s going to capture a lot of information that we’re not getting to the degree we need to make changes to our rules. So we’re talking about reporting and analysis of management fees, for example, related party investments, as well as investments in structure securities and other complex, as it applies to a group of qualifying life insurers. So we’re trying to target that audience, or that sector of the industry where these issues have arisen that we’ve been talking about on this podcast.

Stewart: That’s really helpful, and one of the things that… I know you know, so our audience is insurance investors and asset management firms, and they all want somebody to predict the future for them. So, I’m asking you to polish up the NAIC crystal ball, and what additional changes do you expect in the foreseeable future? That’s a really unfair question, and I’m sorry.

Scott: Well, that’s fair game. And I would start with the beginning of the year we get together and we come up with our strategic priorities for the year. A new one this year, the issue’s not new as we discussed, but it’s become an identified strategic priority as something we call insurer financial oversight and transparency. And so again that includes a lot of the work going on, I mentioned the Macro Prudential Working Group and these 13 regulatory considerations, and again it’s focused on financial transparency around private equity affiliated insurers, but also traditional life companies and related investment activities.

So there’s work going on with industry and also the society of actuaries to improve on best practices for these new asset adequacy tests that I’ve just discussed, in refining the likes of things like spread attribution that differentiate these investment risks. Also, we have one of the working groups, who continue to frame possible concerns with contractual agreements, it might be structure, and avoid regulatory disclosure requirements. Again, it gets back to wanting to capture this information through transparency and refined reporting. The last thing I would mentioned, we always have to keep in mind what’s going on in the international front, and if we look at the IAIS roadmap, it is really honed in this past year on, as one of their macro prudential themes, structural shifts in the life insurance sector, that includes the involvement of private equity.

So, they’re going to be focused on a couple of different things, cross border reinsurance, that we haven’t really spoken about, but also these changes in asset allocation towards more complex and liquid investments.

Stewart: And so just to wrap, start off with you Amnon, simple question, not easy to answer. What are you optimistic about right now?

Amnon: I think there’s a lot to be optimistic about, quite frankly, I gave the example of CLO 2.0, almost a poster child for how improved transparency and standardization could really help an asset class become much more prevalent and accepted by the industry as an efficient vehicle. I’m optimistic that heightened disclosure and the improved processes pushed forth will allow the industry to really improve on their investment processes. I think that there’ll be some costs that the industry will have to bear as they readjust to the new environment, but I think that there’s a real opportunity here. And I’m also optimistic about the fact that the NAIC has been as deliberate, Scott mentioned the adequacy tests that now have heightened requirements around complex assets and around management fees, and while still at their formidable stages, I think we’re seeing the right questions being asked, those discussions are being done very openly with feedback from the industry, and interested parties.

And we’re seeing the process ultimately, what I think, leading to something that will benefit the industry as a whole, and ultimately policyholders.

Stewart: And what about you, Scott. Same question, and before we go there, I just want to say, Amnon has mentioned on several calls the regulatory environment with insurance industry is really unique, and the regulators really go make a tremendous effort and getting industry feedback and it’s an iterative and collaborative process. Which has over time, worked very well. And you guys have a really tough job, and I just want to just throw my two cents in here, that you guys, you’re doing an amazing job and really, very happy to have you on. But same question to Amnon, what are you optimistic about right here?

Scott: Yeah, and I think that transparency piece, and the deliberative process, that I appreciate those remarks, Amnon, and I agree with at our best that’s what we’re trying to do. And it’s always a series of trade-offs, right? It might take a little bit longer, that’s where the NAIC can be criticized, but also we understand that we’re missing things that we don’t involve the industry, and that overall product is better. Actually, Stewart, I would just make the same observations at Amnon in terms of that we have really tried to take a deliberative and transparent approach to identifying and addressing, again, there’s a wide range of potential risks here that result from shifts in ownership structures, and these investment strategies. We’re not trying to foreclose these strategies, as we’ve talked about the benefits, we just want to make sure that we have in place effective rules that better align with these changes, in a way that results in a safer, more transparent and also a competitive landscape. So, that’s kind of the goal there, and we’re very optimistic we’re on the right path forward.

Stewart: That’s fantastic. We have been joined by Amnon Levy, founded and CEO of Bridgeway Analytics, a reg tech form that supports investment and regulatory community, navigating complex regulations in capital markets. And commissioner Scott White, who is the Virginia Commissioner of Insurance, and the Secretary Treasurer of the NAIC. He is also a fellow Missouri Tiger. So thanks very much to both of you for being on, and for your insights. And Scott especially, thanks so much for taking the time and making yourself available to the industry, I know that they appreciate it, and I do too.

Scott: It’s always a pleasure, thank you.

Amnon: Thank you, Stew.

Stewart: If you have ideas for podcasts please shoot us a note at Please rate us, like us, review us on Apple Podcast, it helps so much. My name is Stewart Foley, and this is the podcast.


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