UBS sounds the alarm: A large amount of rating arbitrage emerges in the U.S. insurance industry, and systemic risk may be "increasingly imminent."

According to the Zhitong Finance APP, the chairman of UBS Group has warned that the U.S. insurance industry is facing potential risks. He pointed out that as private financing experiences unprecedented prosperity, the regulation of the U.S. insurance industry is both weak and complex, exacerbating this risk.

"We are beginning to see large-scale arbitrage behavior by rating agencies in the insurance industry," Chairman Colm Kelleher said to peers at the Global Financial Leaders Investment Summit hosted by the Hong Kong Monetary Authority on Tuesday. "In 2007, the core of the subprime crisis was the arbitrage by rating agencies. And now, we are seeing a surge in the number of small rating agencies, whose role is merely to 'tick the box' for investment compliance."

Kelleher made these remarks as U.S. life insurance companies have significantly increased their investments in private debt over the past few years. According to research firm CreditSights, last year these companies allocated nearly one-third of their $5.6 trillion in assets to this sector, a significant increase from 22% a decade ago. This rapid growth has raised alarms among global financial regulators, particularly concerning its potential impact on the banking system.

In September of this year, U.S. subprime auto loan company Tricolor Holdings and auto parts manufacturer First Brands Group filed for bankruptcy. This prompted JP Morgan CEO Jamie Dimon to warn that there may be more "potential hidden dangers" in the financial system.

"In my view, the insurance industry is facing an increasingly imminent systemic risk, rooted in the 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 the private credit ratings used by insurance companies are often concentrated in small rating agencies, increasing the risk of "overstated credit assessments."

The BIS stated that insurance companies typically tend to pursue higher ratings, as this means lower capital requirements; while small rating agencies "may be driven by commercial motives," leading them to provide more favorable ratings.

In this Asian financial hub, the chairman of Switzerland's largest bank also made a series of broad comments. He criticized the Swiss domestic market for gradually losing its attractiveness, as its status as a wealth management center is being replaced by Hong Kong and Singapore.

"Switzerland's role in the global banking industry is facing some sort of identity crisis," Kelleher said. "It is facing significant threats from centers like Hong Kong and Singapore in the global wealth management sector for the first time."

For international wealth management institutions seeking to increase revenue, Hong Kong and Singapore have become increasingly important hubs. Data shows that by 2031, the scale of private wealth managed in Hong Kong could nearly double to $2.6 trillion. The report also noted that Hong Kong is expected to surpass Switzerland this year to become the world's largest cross-border wealth management center.

Zurich-based UBS is currently advancing its integration of former rival Credit Suisse. At the beginning of 2023, UBS agreed to acquire Credit Suisse through a rescue plan. Meanwhile, UBS management is also trying to persuade the Swiss government to relax proposed banking regulatory reforms—reforms that could require UBS to raise up to $26 billion in additional capital