UBS Group AG’s chairman, Colm Kelleher, has raised concerns over systemic risks in the US insurance industry, highlighting the lack of effective regulation as private financing in the sector surges.
Speaking at the Hong Kong Monetary Authority’s Global Financial Leaders’ Investment Summit on Tuesday, Kelleher warned that the rapid growth of small rating agencies in the insurance sector is creating significant risks. “We’re beginning to see huge rating agency arbitrage in the insurance business,” Kelleher stated, drawing a comparison to the subprime mortgage crisis of 2007. “What you see now is a massive growth in small rating agencies ticking the box for compliance of investment,” he added.
The comments come as US life insurers have significantly increased their private debt investments. According to research firm CreditSights, life insurers allocated nearly one-third of their $5.6 trillion in assets to private debt in the past year, up from 22% a decade ago. This rapid expansion has led to concerns from global financial regulators about potential risks to the banking system.
Kelleher pointed out that this surge in private debt investments, combined with weak regulations, could expose the sector to significant risks. “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 said.
The Bank for International Settlements (BIS) also highlighted concerns in a recent report, noting that smaller rating agencies are often used by insurers for private credit assessments, which may lead to “inflated assessments of creditworthiness.” These inflated ratings are especially problematic as insurers tend to favour higher ratings to reduce capital requirements. The BIS noted that smaller agencies might be incentivised to provide more favourable grades due to commercial pressures.
Kelleher’s warnings coincide with a period of increased financial instability. In September, the collapse of subprime car lender Tricolor Holdings and auto parts maker First Brands Group spurred JPMorgan Chase & Co. CEO Jamie Dimon to warn of more “cockroaches” in the financial system, a metaphor for hidden risks yet to be uncovered.
In addition to concerns over US insurance regulation, Kelleher also addressed the shifting landscape of global wealth management. He criticised Switzerland’s position, stating that it is losing its competitive edge in wealth management to Hong Kong and Singapore. “Switzerland is having a bit of an identity crisis about what its role is in world banking,” he remarked, noting that for the first time, Switzerland faces significant competition from Asian financial hubs.
Hong Kong and Singapore have become increasingly important centres for international wealth managers. Bloomberg Intelligence forecasts that Hong Kong’s private wealth under management could nearly double to $2.6 trillion by 2031, with the city poised to overtake Switzerland as the world’s largest cross-border wealth management centre in the near future.
Meanwhile, UBS continues to integrate its former rival, Credit Suisse, following its acquisition in a government-backed rescue in early 2023. The bank’s leadership is also lobbying the Swiss government to reconsider proposed regulatory changes that could impose up to $26 billion in additional capital requirements on the institution.
Kelleher’s comments underscore growing concerns over regulatory weaknesses in both the insurance and banking sectors, as well as the shifting dynamics in global wealth management.