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Insurers shopping for better ratings on their private credit assets are creating a “looming systemic risk” to global finance, the chair of UBS has warned.
Speaking at the Hong Kong Monetary Authority’s Global Financial Leaders’ Investment Summit on Tuesday, Colm Kelleher said the insurance industry, especially in the US, was engaging in “ratings arbitrage” akin to what banks and other institutions did with subprime loans before the 2008 financial crisis.
Kelleher joins a growing chorus of voices pointing to risks in the multitrillion dollar insurance industry, including its holdings of illiquid private credit loans and opaque disclosures.
“What you’re seeing now is a massive growth in small rating agencies ticking the box for compliance of investment,” said Kelleher, who stressed that regulators were failing to get a handle on the industry even as they were pushing for faster economic growth.
“If you look at the insurance business there is a looming systemic risk coming through because of lack of effective regulation,” he said.
The Bank for International Settlements last month said ratings on private credit assets held by US insurers might have been inflated and warned of the risk of fire sales during periods of financial stress.
Smaller rating agencies have captured market share in private credit by providing so-called private letter ratings, which are typically only visible to an issuer and select investors.
US life insurers, which must hold a certain amount of capital in investment-grade assets, have been among the biggest buyers of private credit and private letter rating services.
The ratings have come under additional scrutiny following the high-profile bankruptcies of subprime automotive lender Tricolor and car parts company First Brands, which led to broader concerns about the opacity of the fast-growing industry.
“In 2007 subprime [lending] was all about rating agency arbitrage,” Kelleher said.
The UBS chair also launched a broadside against Switzerland, saying the country was “losing its lustre” because of competition in wealth management from Hong Kong and Singapore and the damage that its pharmaceutical industry had sustained from Donald Trump’s trade war and higher US tariffs.
“Switzerland is facing a crossroads here because it’s facing some major challenges,” he said.
The Trump administration hit Switzerland with an unexpectedly high tariff of 39 per cent in August, one of the highest levels for a western country, dealing a blow to watchmakers, pharmaceutical producers and other exporters.
Kelleher also criticised the Swiss government for its banking regulation, in the latest volley as UBS looks to resist regulatory attempts to impose stricter capital requirements following its absorption of rival Credit Suisse.
“Switzerland is having an identity crisis about its role in the world of banking,” he said.