US life insurers are increasingly moving away from traditional, liquid investments toward higher-risk, illiquid assets, creating significant financial stability concerns. According to reports from Bloomberg Opinion, as of 2023, US life insurers' illiquid investments amounted to more than $2.5 trillion, or about 37% of total assets - up from 31% a decade earlier and more than just before the 2008 financial crisis. This shift from high-quality, easily liquidated bonds to real estate debt and loans to smaller companies is designed to boost profits but carries substantial downsides for policyholder protection.
The industry has significantly increased its exposure to offshore jurisdictions, with life insurance assets in Bermuda now exceeding 150 times that country's gross domestic product. As reported by Bloomberg Opinion, US insurers have moved large chunks of their obligations and related assets to reinsurers - often their own affiliates - in offshore jurisdictions with more advantageous tax and regulatory regimes. This can hide risks from state regulators who oversee US insurance companies until something breaks, as demonstrated when Bermuda-based reinsurer 777 Re recently failed, hitting several insurers in Utah and South Carolina.
Life insurers' traditional funding model faces new challenges as their liabilities have evolved in problematic ways. According to Bloomberg Opinion, while policyholders face penalties for early withdrawals, surrenders can still occur, particularly when higher interest rates make other options more attractive. The situation is further complicated by insurers' increasing reliance on short-term borrowing, with short-term borrowing at US insurers exceeding $400 billion as of 2024, up 82% in inflation-adjusted terms from a decade earlier. This borrowing occurs both outright on short-term markets and implicitly via derivatives, raising the risk of sudden cash or collateral demands.
The growing concentration of illiquid assets and offshore exposure creates potential contagion risks for the entire financial system. As reported by Bloomberg Opinion, if further credit blowups left insurers holding impaired, unsalable assets, concerns about their solvency could force them to pull back on lending, precipitating a credit crunch affecting good businesses and bad. The government might be compelled to bail out the largest, most interconnected institutions at taxpayer expense, similar to the American International Group bailout in 2008. Current regulatory measures by the National Association of Insurance Commissioners can only achieve limited improvement when supervisory power remains fragmented among 50 separate states.
