The chairman of UBS Group AG, Colm Kelleher, has raised concerns about emerging risks within the US insurance industry, citing weak and complex regulatory frameworks in the face of an unprecedented surge in private debt investments.
Speaking at the Hong Kong Monetary Authority’s Global Financial Leaders’ Investment Summit on Tuesday, Kelleher warned that the industry is beginning to see a rise in “rating agency arbitrage,” a practice reminiscent of the 2007 subprime mortgage crisis. “In 2007, subprime was all about rating agency arbitrage. What you see now is a massive growth in smaller rating agencies ticking the box for compliance of investment,” he said.
His remarks come as US life insurers have increasingly invested in private debt over recent years. Last year, close to one-third of their $5.6 trillion in assets was allocated to this sector, up from 22% a decade ago, according to data from research firm CreditSights. This rapid growth has sparked concerns among financial regulators worldwide, especially regarding its potential impact on the broader banking system.
The warning follows recent financial collapses, such as the September failures of subprime car lender Tricolor Holdings and auto parts maker First Brands Group, which prompted JPMorgan Chase & Co. CEO Jamie Dimon to warn that there may be more “cockroaches” lurking within the financial system.
Kelleher expressed particular concern over the lack of effective regulation in the insurance business, stating, “If we look at the insurance business, to me, there is a looming systemic risk coming through and it’s because of lack of effective regulation.” He pointed out that private credit ratings used by insurers are increasingly being handled by smaller agencies, which poses the risk of “inflated assessments of creditworthiness.” This was echoed in a recent report from the Bank for International Settlements (BIS), which warned that smaller rating agencies may have commercial incentives to assign more favourable ratings, reducing the reliability of credit assessments.
The report also highlighted that insurers tend to favour higher ratings due to lower capital requirements, but the use of smaller rating firms could undermine the integrity of these ratings, potentially exacerbating systemic risks in the sector.
In his broader comments, Kelleher also expressed concerns about Switzerland’s position as a global wealth management hub. He described the country as facing an “identity crisis” in the banking world, noting that for the first time, it is facing significant competition from emerging financial centres such as Hong Kong and Singapore. “Switzerland is having a bit of an identity crisis about what its role is in world banking,” Kelleher stated, adding that these cities are rapidly gaining ground. Bloomberg Intelligence forecasts that Hong Kong’s private wealth under management could nearly double to $2.6 trillion by 2031. Moreover, Hong Kong is poised to overtake Switzerland this year as the world’s largest cross-border wealth management centre.
UBS, headquartered in Zurich, is currently focused on integrating its recent acquisition of Credit Suisse, which was part of a government-backed rescue in early 2023. Meanwhile, the bank is also lobbying the Swiss government to ease proposed changes to banking regulations, which could impose up to $26 billion in new capital requirements on UBS.