00:00I mean, for me, this is the Apollo model, which actually has been doing really well since it started.
00:04And so other companies are saying, well, I want to do the same.
00:07Could you, you know, with private equity firms increasingly interested in buying insurers,
00:13why are you wary of such deals? And good morning. Thank you for joining us.
00:17Well, thank you for having me, Francine. It's a pleasure to be here.
00:19And I hope you can see as a good supervisor, I don't look worried. I look at risk.
00:25And what are the risks? What do we see happening in the EU market?
00:29And let's make that distinction between, on the one hand, ownership by private equity of insurers firms
00:34and then investment in equity, private equity by insurers.
00:37Now, the ownership has come up since the last decade.
00:41In the last decade, we've seen ownership going to now 27 firms,
00:46which, frankly, is only 2.4 percent of the total market, which in itself is not worrying.
00:52It's 260 billion assets under management, which is not material.
00:57But we should not stop there.
00:58We need to also think of the EU as 27 member states.
01:02And if we look in that way, we see that a few member states actually have a representation,
01:07have private equity funded ownerships of over 10 percent.
01:11And this is indeed where supervisors need to scrutinize a bit more.
01:15But is it fair to say that this is definitely a trend that started in the U.S.
01:19and that's now permeating or creeping more into Europe?
01:23And why do you see that?
01:24I would say that, first of all, it's definitely a trend that started in the U.S.
01:28and to a certain extent in the U.K.
01:30That has now caught the eye of many.
01:32So what can we do next?
01:34EU is not that developed.
01:35So why not EU?
01:37So fair question.
01:38In the numbers, we do not yet see that happening.
01:41So it's a very steady state already for the last two years.
01:44And I think there are several reasons for that.
01:47But first of all, if you want to move into an EU market with that model, there's two differences you
01:54need to consider.
01:55One important difference is that you need to match to the life portfolio in the EU,
01:59which is mostly life-of-guarantee with a certain lapse risk, whereas the business so far is based on annuities.
02:06And so that is something I would say you need to manage.
02:09It's not impossible, but it's something to consider.
02:12No, go ahead.
02:13No, and so the other differences we currently see is that most of the investments then made also by private
02:20equity-backed insurance firms
02:23in more private credit is still in mortgages and real estate,
02:26whereas we see also in the U.S. that it is part of financing the AI boom that we currently
02:31see.
02:32So I think these are two considerations that you need to take on board.
02:35But for sure we're monitoring this because we do see a lot of interest explorations in the market.
02:41Shall we come to EU?
02:42And I think it will.
02:44So what's been the feedback from the industry so far?
02:46I guess there's a lot more clarity at the moment on how you're thinking of this.
02:51So does it entice more buyers or actually does it scare private equity off?
02:55I would say that currently it's really in the exploration phase.
02:59What are the possibilities in the EU market?
03:01And that is welcome.
03:02I think private credit can bring innovation.
03:04It brings access to new capital.
03:06We need that in the EU.
03:08But it should come, I think, with a reasonable understanding of the new risk that it brings,
03:13be it liquidity risk, be it credit risk, be it simply the opacity that comes often with it
03:19and the need for transparency and clear valuation to understand not so much who's the owner of the insurer,
03:26but who's the owner of the risk.
03:28So studies, I understand, have shown that insurers actually owned by private equity
03:32also tend to invest more in private credit.
03:34So how much is too much private credit for an insurer?
03:38Well, I would say there is not a per se a certain limit that we have,
03:43but we have a lot of tools within the toolbox of supervision, which is Solvency 2 in the EU.
03:49And the most important one, I would say, is the prudent person principle.
03:53And the prudent person principle says, first of all, if you invest in assets,
03:57you need to be able to identify, measure, manage and report the risks.
04:01So this is where transparency data is essential.
04:05And the second is that you need to do that in a way that you take on board the interest
04:09of the people you invest for, which is the individual sent to citizens.
04:13And we're often talking about pensions here.
04:15Do you think there's an understanding, a sufficient grasp of the risks that they're taking?
04:21And how are, I guess, losses in this asset class evolving?
04:25I would say it depends.
04:28Credit was bank business, let's be honest.
04:31And so if you start to move into this business, you need to step up your knowledge.
04:35You need to be able to probability given default, the loss given default,
04:40and the probability of default, these models you need to develop.
04:43You need to have the data for that.
04:44You need to have the competence for that.
04:46At the same time, you need to have a clear understanding of how your liabilities,
04:50the liquidity risk, the liquidity of those liabilities, the needs there,
04:54but also the credit risk that you run, the liquidity risk that you run,
04:59how that matches with the liabilities.
05:01Why?
05:02Because if the markets become volatile, and they tend to do that these days,
05:06you want to be sure that liabilities and assets move in a matched way,
05:11and there is not an increased response in the market because matching wasn't done properly.
05:17And this is precisely why we as supervisors are monitoring that very carefully.
05:21Are there any specific insurers that give you cause for concern because of their risk exposure
05:27or their involvement with private markets?
05:30Well, let's say that.
05:31I mean, I can never discuss individual insurers, but we have individual markets where we see the
05:36concentration already of this type of activity being larger than the EU average.
05:42And here, for sure, as the EU supervisor, we talk to the national supervisors to make sure they understand.
05:50Meanwhile, I would say we're not reacting.
05:52We're preventing, in a way, by publishing a supervisory statement,
05:57explaining also to other EU member states' supervisors what they need to do
06:01when this activity starts to happen in their market, what to look for, how to address it,
06:06learning from the others that already have more experience.
06:08But is it, I mean, we talk a lot about software companies and the fact that they could actually
06:13be disrupted by AI in a very meaningful way.
06:16Is this your biggest concern right now so that companies invest in that space?
06:20So currently, if you look at total assets in the EU, $10.5 trillion,
06:25of that 5% is private credit at the moment, only 5%.
06:29And within that 5%, 80% is real estate and mortgages.
06:33So my answer is no.
06:35We do not see that in that way currently in the EU market today.
06:39So we're really saying we need to be ready for the future much more looking at other markets
06:44than being concerned about the risks today manifesting itself.
06:48But how difficult is it for a regulator or supervisor to look at the disruption from AI
06:53and actually the risks there that could be, in certain cases, I imagine systemic?
06:58Well, it keeps us on our toes, first of all, which is good.
07:03And we need to work with it as well.
07:05And so I think a lot is about coordination, international and within EU on what we see
07:10and how we deal with that knowledge.
07:12And mostly, and this is where systemic risk happens,
07:15it's understanding the interconnectedness and through the opaqueness.
07:19So less opaqueness helps to understand the connections that are possibly there.
07:24systemic risk often comes up by slowly interconnection growing,
07:30not everyone seeing it.
07:31And then when...
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