HKMA Research Links Private Equity Ownership of Asian Insurers to Higher, Riskier Private Credit Exp

Key Takeaways

• A Hong Kong Monetary Authority research memorandum finds that private equity (PE) ownership of Asia-Pacific (APAC) insurers is rising and is associated with larger allocations to opaque, higher-risk private credit (PC).
• The paper is not a rule or a directive, but it signals supervisory attention to contagion risk between the private finance ecosystem and insurers.
• Compliance and risk teams should treat it as an early indicator of possible scrutiny of investment governance, capital treatment, and disclosure.

Deep Dive

A Hong Kong Monetary Authority research memorandum finds that private equity (PE) ownership of Asia-Pacific (APAC) insurers is rising and is associated with larger allocations to opaque, higher-risk private credit (PC). The paper is not a rule or a directive, but it signals supervisory attention to contagion risk between the private finance ecosystem and insurers. Compliance and risk teams should treat it as an early indicator of possible scrutiny of investment governance, capital treatment, and disclosure.

Using a sample of 81 insurers across nine jurisdictions (about 90% of assets in those markets), the study finds:
- The share of APAC insurers with at least minority PE ownership rose from 24% to 36% over the past decade.
- APAC insurers allocated about 10% of assets to PC at the end of 2024, versus about 14% for US life insurers and 5% for EU insurers. The APAC figure may be overstated.
- After PE investment, allocations to PC funds, structured credit, and private bonds rose by 8 percentage points of assets on average, and by 13 points after majority acquisitions. Effects emerge gradually, over one to two years.
- PE-owned insurers hold more opaque PC (62% of PC holdings versus 48%) and riskier PC. For example, 68% of their PC fund exposure is in risky strategies such as distressed debt, versus 41% for non-PE-owned insurers. Also, 53% of their direct loans go to vulnerable borrowers, versus 47%.
- PE firms appear to target insurers with more liquid portfolios (32% more likely) and less stringent capital requirements (43% more likely). Favorable capital treatment of rated PC funds or structured credit, relative to unrated loans, may amplify the effect.

Exposure to PC funds is an upper-bound estimate because some insurers report only broad private fund holdings. Exposure was classified using a generative AI model, and the risk-level datasets cover only a small part of insurers' PC holdings. Cross-region comparisons and the unrated-borrower findings should be read with caution.

Recommended actions:
- Insurers: review the governance of PE-affiliated investment mandates, including conflicts of interest, related-party arrangements, and board oversight of PC allocation.
- Assess look-through transparency for PC funds and structured credit, and stress test for losses, liquidity, and rating migration.
- Examine whether capital treatment is driving allocation shifts, and document the rationale for any reliance on external ratings.
- Banks, asset managers, and PE sponsors: map counterparty and funding links to insurers, and prepare for possible supervisory information requests.
- All firms: monitor HKMA, IAIS, FSB, and other regulators' follow-up work on private credit.

The main concern is contagion: stress in private markets could transmit to insurers, which hold a large share of regional assets. APAC accounts for 29% of global insurer assets, so stress could have wider financial stability effects. Near-term regulatory impact is low, but the medium-term risk of tighter disclosure, capital, or concentration expectations is moderate.

Source: Hong Kong Monetary Authority