The life insurance market has undergone substantial changes in recent years, driven by prolonged low interest rates, evolving consumer preferences, more complex investment practices, and increased use of reinsurance. These shifts have introduced new opportunities and risks, prompting state regulators, through the NAIC, to holistically strengthen oversight and modernize the solvency framework. From enhanced capital requirements and transparency measures to updated scenario modeling and stress testing to tailoring reliance on credit ratings, these actions ensure insurers remain financially sound and capable of meeting their promises to policyholders. Learn how regulators are adapting to protect consumers and maintain market stability in a rapidly changing environment. 

Understanding the Issue

Following the 2008 financial crisis, the life insurance sector experienced major structural transformations driven by an extended period of low interest rates. Lower yields on traditional investments pressured insurers to seek alternative strategies to meet long-term obligations. This shift involved a greater reliance on complex assets, private credit, and an increase in transactions involving private equity firms. This shift also brought an increased use of reinsurance to support the increasing demand for retirement products such as annuities. While these strategies can enhance diversification and access to capital, growing the market to meet consumer demand, they also introduce liquidity risks and reduce transparency, creating potential vulnerabilities for policyholders and the insurance industry.  

Why It Matters

Consumers depend on insurers to honor their commitments during critical life events. If insurers assume excessive risk or lack sufficient reserves, their ability to pay claims could be compromised. Regulators have a mandate to ensure that innovation in investment practices does not undermine solvency or consumer confidence. 

Regulatory Actions

State insurance regulators, through the NAIC, have implemented a comprehensive set of measures to strengthen oversight and mitigate these risks:

• Enhanced Transparency and Reporting: New disclosure requirements provide regulators with detailed information on affiliated investments (i.e. investments between two companies within the same organization), private equity transactions, and complex holding structures, reducing the likelihood of hidden exposures.
• Capital and Reserve Adequacy: Regulators have raised risk-based capital charges for higher-risk assets and adopted updated asset adequacy testing guidelines to ensure insurers maintain sufficient financial resources to support liabilities.
• Scenario Modeling and Stress Testing: The NAIC modernized its economic scenario generator (GOES) to incorporate low-interest-rate conditions and conducts annual stress tests on exposures such as collateralized loan obligations (CLOs).
• Tailored Regulator Use of Credit Ratings: A new framework for more informed regulatory use of and reliance on credit ratings and, in limited circumstances, allows regulators to challenge use of investment ratings that would result in capital requirements that do not reflect underlying risk. 
• Oversight of Private Equity and Reinsurance: States have imposed stricter conditions on acquisition of U.S. insurance companies by private equity, including collateral requirements and higher capital thresholds. More importantly, states continually monitor the financial condition of insurers, with increased monitoring as new or increasing risks are identified. 

Consumer Protection Outcomes

These initiatives aim to preserve policyholder security, improve market transparency, and reduce risk while allowing innovation and broadening market participation. By proactively adapting regulatory frameworks, state regulators reinforce the stability of the insurance sector and uphold their core mission: ensuring insurers remain reliable stewards of consumer premiums and capable of meeting obligations under all economic conditions.  

Learn More

The NAIC’s Capital Markets Bureau monitors developments in the capital markets globally and analyzes their potential impact on the investment portfolios of U.S. insurance companies. Please see the Capital Markets Bureau website at INDEX.