Insurance Firms Wade Into Alternative Finance

Alternative lenders and marketplace finance companies emerged to fill in gaps left by traditional banks when it comes to financing and loans, but according to Bloomberg reports, another industry is getting in on the action: insurance.

The outlet said insurance firms, like MetLife and American International, are branching out into an array of lending practices, including small business lending.

“There’s no question that insurance companies are looking to diversify into new areas and innovate as much as possible,” said Adam Hamm, who serves on the U.S. Financial Stability Oversight Council and is North Dakota’s insurance commissioner, in an interview.

According to reports, the insurance market’s interest in alternative lending is just another symptom of the overhaul endured by the traditional lending industry following the 2008 financial crisis, with change largely fueled by recent regulations.

But insurance firms are also interested in the space because of its potential for higher returns than traditional investments, like U.S. Treasury notes, thanks to low and negative interest rates.

“Given the lack of liquidity in the securitized markets, which is how many insurers have previously purchased loans, insurers are now waking up to the reality that it’s better to own the loans directly,” explained AIG Chief Investment Officer Doug Dachille, Bloomberg reported.

In general, insurance companies are regulated state by state, with a few exceptions, like AIG and Prudential Financial, which were categorized by federal authorities as “systemically important financial institutions,” reports noted.

Industry players also told the outlet that insurance companies can offer more competitive rates for alternative loans, like mezzanine financing, without loosening term loans or compromising underwriting practices. Not to mention, insurance companies are experts in the field of underwriting.

Insurance companies hold 11.6 percent of the total global private debt market, reports said.