UBS Warns of Systemic Risk From Weak US Insurance Regulation

UBS Group AG’s chairman warned against looming risks in the US insurance industry, citing weak and complex regulations amid an unprecedented boom in private financing.

“We’re beginning to see huge rating agency arbitrage in the insurance business,” Chairman Colm Kelleher told his fellow financiers at Hong Kong Monetary Authority’s Global Financial Leaders’ Investment Summit on Tuesday. “In 2007, subprime was all about rating agency arbitrage. What you see now is a massive growth in small rating agencies ticking the box for compliance of investment,” he said.

Kelleher’s comments come as US life insurers have ramped up private debt investments over the past few years, allocating close to one-third of their $5.6 trillion in assets to the sector last year, up from 22% a decade ago, according to data compiled by research firm CreditSights. The rapid growth has prompted financial regulators globally to raise alarms, particularly on how it might hit the banking system.

In September, US subprime car lender Tricolor Holdings and auto parts maker First Brands Group collapsed, spurring JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon to warn of more “cockroaches” in the financial system.

“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,” Kelleher said.

Private credit grades used by insurance companies tend to be concentrated among smaller ratings firms, raising the risk of “inflated assessments of creditworthiness,” the Bank for International Settlements said in a report published last week about systemic risks and policy challenges in the life insurance industry.

Insurers typically seek out higher ratings because of their lower capital requirements, while smaller agencies “may face commercial incentives” to provide better grades, according to the BIS.

In a set of wide-ranging comments in the Asian financial centre, the chairman of Switzerland’s largest bank also blasted his home market as losing its luster as a wealth management hub to Hong Kong and Singapore.

Switzerland is “having a bit of an identity crisis about what its role is in world banking,” Kelleher said. “For the first time, it’s facing a major threat in global wealth management from centers like Hong Kong and Singapore,” he added.

Hong Kong and Singapore have become even more important hubs for international wealth managers seeking to boost revenue. Hong Kong’s private wealth under management could nearly double to $2.6 trillion by 2031, according to Bloomberg Intelligence. Hong Kong could also overtake Switzerland as the world’s largest cross border center this year, the report said.

UBS, based in Zurich, is working through the integration of its former rival Credit Suisse, which it agreed to acquire in a rescue operation in early 2023. The lender’s leadership is also trying to convince the Swiss government to water down planned changes to bank regulation that could impose as much as $26 billion in fresh capital requirements on the bank.

Photograph: UBS Chairman Colm Kelleher Photo credit: Lam Yik/Bloomberg