No predictions this year. But if you weren’t planning on paying attention to the insurance sector in 2024, you might want to. In a year when the Fed slowly fades into the background due to range bound interest rate moves, economic activity will be largely driven by consumer behavior. The holiday season/Q4 data is already trickling in, and it strongly suggests a diminution of consumer purchasing power as a result of greater credit card leverage, increased delinquencies, and further declines in household savings. On a different front in 2024, high interest rates will hit the consumer as the first cohort of adjustable-rate mortgages (3-year ARMs) reset, and non-core CPI expenses, food and energy, remain stubbornly high. But for all the headline fodder – the Fed, interest rates, CPI, credit cards, savings, and mortgage rates – when was last time you heard anyone talking about their insurance premiums? Have you looked at your own recently? Across the spectrum of insurance products, particularly auto, home and catastrophe, premiums have exploded.
And, there’s more.
It isn’t just a consumer story, it’s a systemic one. Per the FT this past October:
“Over the past decade, many of the world’s largest private equity groups, such as Blackstone, Apollo, Brookfield, KKR and Carlyle, have acquired or partnered with life insurers as a means to invest broader portfolios of credit-oriented assets. These private equity-backed insurers have increased investment into private credit assets such as securitised products, private debts, and lower-rated loans. Moody’s recently found that private equity-owned insurers have invested $102bn into asset-backed securities, nearly a third of their total bond investments and about triple the exposure held by the broader insurance industry.”
With the global surge in capital allocation to private credit funds over the past few years rising to roughly $1.5 trillion in 2022 from $726 billion in 2018, PE-backed insurance companies, many of them large life insurance underwriters, have become a major source of funding. So much so that they represent a potential systemic risk as a function of the massive amount of capital allocated and the percentage of insurer assets invested. Let’s not forget these are unregulated and opaque investment vehicles to boot.
With corporate private credit defaults expected to increase to 5% next year, and consumer credit delinquencies reaching a rate not seen since 2013, there’s going to be a reckoning (degree unknown) in this ecosystem, especially with funds that have invested in asset backed securities. This reckoning, or “correction,” if it should affect a large carrier with a substantial allocation to the same, could cause a run, precipitating policyholder withdrawals, and ultimately, insolvency. This concept was brought to the fore back in October by US private equity investor J Christopher Flowers.
Returning to the direct, consumer-facing risks, car insurance premiums have risen 43% in the past 3 years. Reinsurance rates for property catastrophe have gone up a staggering 30-50% in 2023 alone (depending on where you live). And these rising reinsurance costs are being passed through to consumer residential P&C premiums. Yours truly now pays 20% more for homeowners than last year.
Is the tangled web coming into view yet?
Perhaps for some, it seems more straight forward. One could certainly conclude from the data that there’s a simpler way to think about the complex interrelationship between the consumer, insurance, and private credit funds in 2024: a retail vs. institutional story. But that would be a gross oversimplification.
In sum, a very large source of the risk, or at a minimum, an outsized component of it, ties back to the consumer. Aside from the corporate debt allocation to private credit funds, the asset backed securities these funds are holding are largely baskets of consumer (and SMB) obligations, including auto loans, mortgages, credit card debt, and personal and small business loans. We know that because interest rates and non-core CPI are high, savings are down, delinquencies and default risks are rising, and insurance premiums are going through the roof, the consumer financial position continues to deteriorate. Now add the systemic risk of a private credit fund blowing up because of losses to core ABS holdings, and the subsequent chain reaction of taking out an over-allocated insurance company, and it’s a tangled web of risk indeed.
