Germany’s financial regulator plans to ask the country’s insurers if they grasp the risk of investments they have made in direct loans and private credit funds after a search for yield in the previous decade.
Insurers’ management of risks from private debt and other alternative assets will be a special focus of BaFin’s assessment this year of their investment behavior, Mark Branson, who leads the watchdog, told reporters in Frankfurt on Jan. 28.
German insurers were lured to private credit when central banks cut interest rates to record lows in the wake of the last financial crisis, depressing bond yields. While higher borrowing costs mean interest on bonds has since risen, direct lending is still booming as investors snap up the asset class that pledges fat returns.
“This is a case of qualitative risk management,” Branson said of BaFin’s approach to insurers. “Do you know what you are doing in this area? And do they have the expertise?” The watchdog has previously identified shortcomings in insurers’ credit businesses that it will follow up on, he said.
Private equity made up 5.2% of German insurers’ investments in mid 2022 while private credit accounted for 4.1%, compared with a combined 4.7% at the end of 2019, according to findings of a now discontinued BaFin survey. Private debt accounted for as much as 30% of investments at some insurers in 2019, the regulator said.
“A small addition to a big portfolio is one thing,” said Branson. “But just because clients bear losses in the end — if we think of life insurers — doesn’t mean one should manage things any less strictly than a bank would when looking at its own balance sheet.”
