Relationship Between Insurers and Private Capital Firms Continues to Strengthen

The symbiotic relationship between insurers and private capital firms has continued to grow in the last decade and created a new philosophy for value creation.

The “virtuous flywheel” approach is increasingly being utilized by insurers backed by private-capital firms, according to McKinsey strategists.

The approach consists of three major components contributing to value creation: issuance of insurance policies and annuities at scale, differentiated investment management and capital management.

The three components are “self-reinforcing”,  the strategists said, as the increase in policy issuances leads to more capital that can be invested, as does raising funds from third-party investors. This, in turn, means insurers can build stronger investment capabilities and that growth in earnings allows for the flexibility to offer better policy prices.

The strategists said:  “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.”

Private equity firms, which are usually reliant on pension funds and sovereign wealth funds, use equity from insurance firms to expand their supply of permanent capital, as the assets from insurance firms do not have to be returned to investors on a timetable, or at all in some cases.

For insurers, private capital investment has helped them improve their return on equity (ROE) and free up capital.

The market has continuously grown over the last 10 years, with private capital firms injecting more than $31 billion of net new private capital into the life and annuities industry worldwide since 2014.