Over the past decade, private-capital firms and insurers have built a symbiotic relationship. Private-capital firms, which typically raise money from institutional investors such as pension funds and sovereign wealth funds, encompass multistrategy private-market firms, private-credit firms, private equity firms, and real estate firms. Tie-ups with insurers have allowed private-capital firms to expand their supply of permanent capital—investment funds that do not have to be returned to investors on a timetable, or at all. That expansion has brought in recurring management fees, accelerated earnings growth, and, in some instances, boosted valuations. At the same time, managers have been able to reduce the time and effort spent on fundraising, especially during downturns, when capital becomes scarce. The new partnerships have also enabled the rapid expansion of private-capital firms’ credit capabilities.
Insurers, meanwhile, have also benefited: some by selling their legacy books (or reinsuring them) to improve their ROE and free up capital, and others by accessing distinctive investment-management capabilities and supporting their business growth.
As private-capital firms have gained market share in the insurance sector, they have injected more than $31 billion of net new private capital1 into the life and annuities industry worldwide since 2014. To put that in perspective, over the same period, publicly traded insurers have returned about $175 billion to shareholders, representing 74 percent of their collective current market capitalization.
Since we examined the convergence of insurance and private capital in depth in a 2022 article, the symbiotic relationship between these two industries has strengthened, with the following developments taking place:
- Private capital’s consolidation of life and annuities liabilities has grown bigger and has become more common, and participants are now looking to new business sales, more complex liabilities, and international markets to continue growing.
- New types of businesses are entering the market. Participation has been historically limited to a few diversified private-capital firms and insurers. However, traditional insurance companies have adjusted and are now competing with private-capital firms in some areas by building out their own investment capabilities. And in certain cases, participants from these two sectors are collaborating, with a broader set of private-capital firms and traditional asset managers wading into the insurance market.
- Insurers and private-capital firms with insurance holdings are taking their investment capabilities to the next level. Historically, insurers invested the money from selling policies in public bonds, then diversified by buying private loans from third parties. Now, insurers and private-capital firms are using life insurance books to build out differentiated asset management capabilities (or partnering with others to do so). In private credit, for example, they may own platforms for making loans directly, build syndication businesses to sell portions of the loans to third parties, and raise third-party capital to manage loans for other investors. In real assets, they may own companies that operate the assets—such as real estate, energy, and infrastructure—and ownership may lead to higher returns.
In this article, we examine the recent developments at the intersection of insurance and private capital in detail and offer insights into the strategies insurers are using to generate value from the two sectors’ convergence. The playbook of leading firms suggests that the best approach is to harness the power of a self-reinforcing “flywheel” that combines the issuance of insurance policies at scale, differentiated asset management, and capital flexibility to support continued growth.
The current landscape
Private capital began trickling into the life and annuities sector after the global financial crisis of 2007–09, when traditional insurers faced profitability challenges. Insurers were plagued by policies written before the crisis, during a fundamentally different interest rate and equity market. Private-capital firms saw the opportunity and began acquiring legacy books of business from insurers. Since then, worldwide, private-capital firms have completed more than $900 billion2 in transactions acquiring life and annuity liabilities. Expanding beyond legacy policy acquisitions, private-capital firms (and their insurance platforms) have moved into new business sales. Today, they account for 35 percent of new sales in fixed and fixed-indexed annuities in the United States, up from 7 percent in 2011. This comes against the backdrop of a broader unbundling in the insurance industry, with some insurers choosing where to participate across the value chain and consequently shifting their business models.
The virtuous flywheel
For leading insurers backed by private-capital firms, and increasingly for some traditional insurers as well, value creation is supported by a new philosophy. Call it the virtuous flywheel (exhibit). In this approach, value creation is propelled by three major components, all working together to accelerate premium and earnings growth and increase ROE:
- Issuance of insurance policies and annuities at scale. Building sufficient scale and predictability into the issuance of policies provides a foundation for insurers to expand their asset management capabilities, ensuring they will have enough funds to invest.
- Differentiated investment management. Originating private assets such as loans to generate higher risk-adjusted yields, while building rigorous risk management capabilities, can help insurers increase earnings, some of which can be reinvested into better policy pricing to support market share expansion. In addition, the capital invested from policies can be used to raise third-party capital and manage assets on behalf of other investors.
- Capital management. Expanding capital flexibility is a crucial component of the flywheel. Insurers can bring in third-party capital to boost growth, and those that have balance sheets in various countries can decide which jurisdiction is best for holding certain assets.
The flywheel is self-reinforcing. Issuing more policies leads to more capital that can be invested, as does raising funds from third-party investors. More capital means insurers can build stronger investment capabilities, gaining the necessary scale to justify acquiring loan origination and real-asset operating platforms. Strong earnings growth means insurers can have the flexibility to offer better policy prices, allowing them to be more competitive in selling more policies and gain market share. Success in one component of the flywheel brings gains in the other components.
Opportunities and risks
For those that successfully implement the flywheel approach, the opportunity is significant. In the United States, according to McKinsey analysis, insurers backed by private-capital firms have gathered nearly $700 billion in assets through 2023 and now command 13 percent market share in the insurance industry, up from 1 percent in 2012. Simple, spread-based liabilities, such as fixed and fixed-indexed annuities, have been the most attractive area of focus in the United States, given they provide a guaranteed liability cost and duration.
International markets offer an attractive frontier. Two in particular, Japan and the United Kingdom, stand out as destinations for insurers and private-capital firms that have holdings in life insurance, whether or not they already have a presence in these countries. The UK bulk-purchase-annuity market, in which defined-benefit-pension programs transfer liabilities and assets to specialized life insurers, has potential reinsured reserves of about $200 billion. That’s a sizable opportunity that could come online soon, as higher rates have allowed more pension programs to declare themselves fully funded—making their books easier to sell. Still, a significant portion of this reinsurance is expected to remain in the United Kingdom.
Japan offers even more opportunities, McKinsey analysis indicates: up to $600 billion in reserves of whole-life insurance and fixed annuities could be reinsured, as a new regulatory regime scheduled to come into force in 2025 is likely to prompt publicly traded insurers to sell liabilities denominated in both dollars and yen. Additional opportunities could come into play as insurers in Japan, in partnership with wealth managers, develop innovative products designed to encourage consumers to move banking deposits into fixed annuities.
While the flywheel strategy has generated significant value, it comes with risks and requires thorough guardrails for risk management, asset liability matching, underwriting expertise, and credit monitoring. Some entities executing the flywheel strategy invest three to four times the amount that typical life insurers put into private asset classes, namely asset-backed securities and real assets (taking on more credit and liquidity risk). In an economic-slowdown scenario or a deteriorating credit environment, these assets may be more likely to face defaults and credit downgrades, prompting insurers to realize losses to shore up capital. The tie-ups between insurers and private-capital firms have also drawn scrutiny from regulators and lawmakers worried about defaults and other negative events in the insurance sector spreading to other parts of the financial system and the broader economy in case of a downturn.3
Building the flywheel
Insurers and private-capital firms active in insurance have several approaches to choose from when putting together the flywheel: building all elements in-house, outsourcing some to partners, or forming joint ventures. The optimal path will vary, based on an insurer’s starting position, the capital available to invest, and its capabilities across the flywheel. Here, in detail, are elements to consider.
Selling insurance at scale
There are many ways to sell insurance at scale, but typically they share several commonalities: a deep presence in selling policies to individuals, corporations, and institutions; an effective sales network across multiple channels, including banks, broker–dealers, and independent marketing organizations; the ability to offer competitive policy pricing; and geographic diversity. Collectively, these capabilities enable insurers to react to changing market conditions.
Differentiated investment management
The flywheel brings investment management front and center in terms of value creation. While life insurers are historically conservative, buy-and-hold investors, private-capital firms’ entry into the sector and their different approach to investment management have reshaped the possibilities.
Insurers selling life insurance policies at scale need to be able to invest the resulting assets at scale as well, particularly in higher-yielding private assets. Insurance companies with the strongest financial results have the capabilities to not only underwrite such assets but also acquire two types of platforms that can boost earnings and ROE: platforms for operating real assets and platforms for making private loans—such as for aircraft or for leasing equipment—directly to borrowers.
Owning real-asset operating platforms enables insurers to gain insights and make decisions that can lead to higher returns (such as by minimizing how long properties are left vacant). By owning platforms for making loans, insurers can earn additional fee streams (if they build a syndication capability to sell a portion of the loan to third parties or raise third-party capital to manage the loans on behalf of other investors). In addition, insurers can control the supply of loans to match their rising liabilities, rather than relying on the market to provide sufficient loan volume. These capabilities enable insurers to earn higher yields on their investments, which could be used to offer better prices to consumers and thereby sell more insurance policies.
Capital management
Insurers have always needed to manage capital to ensure they can cover policyholder claims. The flywheel strategy increases the complexity of capital management, requiring insurers to increase capital flexibility. This involves gaining access to new sources, such as third parties; considering ownership structures and jurisdictions; and robustly managing capital frameworks:
- Third-party capital provides insurers with increased growth potential, as well as access to new capabilities. One structure that’s grown increasingly popular in attracting third-party capital is the sidecar. With this structure, an insurer transfers liabilities into a new vehicle that is capitalized by that insurer and third-party investors. These investors—most commonly long-dated institutional investors, such as sovereign-wealth funds and pension funds, family offices, and asset managers—typically expect steady rates of return in the mid-teens with consistent cash flow generation. Asset managers provide their own investment capabilities to support the sidecar’s performance.
- When deploying capital, insurers can optimize ROE by aligning the ownership structure and jurisdiction choices with the types of assets and liability risks. Various jurisdictions, for instance, will have different regulatory capital charges for different asset classes and liability profiles.
- Insurers should allocate capital across the various balance sheets to which they have access: owned balance sheets, sidecars, and the balance sheets of third-party reinsurers. Reaching such decisions requires building a robust set of qualitative and quantitative frameworks, as well as strong data analytics, modeling, and scenario analysis capabilities to inform the decisions and trade-offs concerning which balance sheets best fit various types of liabilities and assets.
Where to go from here
Today’s insurance market looks starkly different from the market of ten years ago. League tables contain new insurers, many of which are applying the flywheel playbook as a core strategy. Traditional insurers, including many that funded private-capital firms’ growth via risk transfer, have adopted elements of the flywheel playbook. With many more participants getting on the flywheel bandwagon, trends point to the evolution of the market landscape and the emergence of four archetypes. The first is integrated models, with distinctiveness in all three flywheel elements. The remaining three archetypes focus on distinctiveness in one or two of the flywheel elements and can be broken down into proprietary-distribution-edge specialists, wholesale-product-origination specialists, and balance sheet specialists. There is no one winning model, and insurers can assess their capabilities to figure out which archetype might work best for them. We present the archetypes in detail below.
Integrated models (with distinctiveness in all three flywheel elements)
This segment includes insurers backed by private-capital firms, which are expected to keep raising the bar in each of the three core capabilities of the flywheel. In investment management, these insurers will broaden their loan origination platforms—both in the United States as the private-credit market continues to expand and in non-US markets, where other currency denominations can support non-US liabilities. This investment edge will let these insurers participate in more complex liabilities, such as guaranteed universal life insurance and long-term care insurance. We expect many insurance companies to enter new jurisdictions and expand fundraising to more investors, such as high-net-worth individuals and family offices.
More ‘unbundled’ models (with a focus on distinctiveness in one or two flywheel elements)
Insurers without a pathway toward distinctiveness across the flywheel may focus on specific elements and outsource the rest. These “unbundled” subsets of insurers include the following:
- Proprietary-distribution-edge specialists. These insurers sell their own products and services through a proprietary channel, building distinctive customer insights, risk assessment, product development, and underwriting capabilities.
- Wholesale-product-origination specialists. These insurers follow a similar model but focus on strong third-party sales via agents, broker–dealers, and employee benefit brokers.
- Balance sheet specialists. These insurers have distinctive risk assessment capabilities, combining this expertise with strong balance sheets to absorb various risk types.
Making progress on the journey to value creation
Some insurers are already well established or starting to migrate toward one of these archetypes, while others may need to radically transform their business models. The stakes are high. Insurers should first define what the North Star looks like for them—whether it is maintaining market share in a specific product category, adjusting the mix of their spread-based and fee-based earnings, or boosting assets under management of the affiliated asset manager. Then, they must identify the parts of the flywheel in which they are most distinctive. In areas where they are not distinctive, insurers will need to decide whether to strike partnerships or develop their own pathways forward. Those that keep doing things the old way will find it increasingly challenging not only to compete but to survive.
