UBS sounds the alarm: a large number of rating arbitrage in the US insurance industry has emerged, and the systemic risk may be "increasingly close".

UBS Group Chairman warns that the US insurance industry is facing potential risks. He pointed out that as private financing experiences an unprecedented boom, the regulation of the US insurance industry is both weak and complex, exacerbating this risk. "We are starting to see large-scale arbitrage behavior in the insurance industry," Chairman Colm Kelleher said at the Global Financial Leaders Investment Summit held by the Hong Kong Monetary Authority on Tuesday. "In 2007, the core of the subprime crisis was arbitrage by rating agencies. Now, we are seeing a proliferation of small rating agencies whose role is just to 'tick the box' for investment compliance." At the time of Kelleher's remarks, US life insurance companies have significantly increased private debt investments in recent years. According to data from research firm CreditSights, these companies allocated nearly one-third of their $5.6 trillion in assets to this area last year, a significant increase from 22% a decade ago. This rapid growth has raised concerns among global financial regulatory authorities, particularly regarding its potential impact on the banking system. In September of this year, US subprime auto lender Tricolor Holdings and automotive parts manufacturer First Brands Group both declared bankruptcy. This event prompted JPMorgan Chase CEO Jamie Dimon to warn of potential "hidden dangers" in the financial system. "In my opinion, the insurance industry is facing an increasingly imminent systemic risk, stemming from a lack of effective regulation," Kelleher said. A report released last week by the Bank for International Settlements (BIS) on systemic risks and policy challenges in the life insurance industry pointed out that private credit ratings used by insurance companies are often concentrated in the hands of small rating agencies, increasing the risk of "overestimation of credit quality". BIS stated that insurance companies typically seek higher ratings, as this implies lower capital requirements; while small rating agencies "may be driven by commercial incentives" to provide more favorable ratings. In this ASIA FINANCIAL center, the Chairman of Switzerland's largest bank also made a series of wide-ranging comments. He criticized Switzerland's domestic market for gradually losing its attractiveness, with its position as a wealth management center being overtaken by centers such as Hong Kong and Singapore. "Switzerland is facing an identity crisis in the global banking industry," Kelleher said. "It is facing a significant threat in the global wealth management field from centers such as Hong Kong and Singapore." For international wealth management firms seeking to increase revenue, Hong Kong and Singapore have become increasingly important hubs. Data shows that by 2031, the private wealth managed in Hong Kong could nearly double, reaching $2.6 trillion. The report also pointed out that Hong Kong is expected to surpass Switzerland this year to become the world's largest cross-border wealth management center. UBS, headquartered in Zurich, is currently moving towards integrating with former rival Credit Suisse. In early 2023, UBS agreed to acquire Credit Suisse through a bailout plan. The UBS management is also trying to convince the Swiss government to relax proposed banking regulatory reforms that could require UBS to set aside an additional $26 billion in capital.