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Complex Assets in Insurance and Annuity Industries

February 2026

Authors

Milliman, Inc.
Lucy Ouyang, FSA, MAAA
Jim Stoltzfus, FSA, MAAA
Valea Coyne, MSF
Ken Qian, FSA, MAAA
Florin Ginghina, FIA
Fiona Ng, FSA, MAAA
Tushar Mittal
Daniel Maka
Jie-Hee Park
George Zumanu, Ph.D.
Emmanuel Boamah

Summary: Modeling Complex Assets

Life and annuity insurers have been steadily adding more structured securities and other “complex assets” to their investment portfolios over the past decade. The report attributes the shift first to the post–financial-crisis low-rate environment, which pushed insurers to look beyond public corporate bonds for additional spread, and more recently to higher interest rates and tighter bank lending, which have increased the flow of loans into securitized structures.

This research (Phase I) reviews what these assets are, why insurers use them, and what risks they introduce. The scope is primarily securitized assets—including collateralized loan obligations (CLOs), asset-backed securities (ABS), mortgage-backed securities (MBS), and related private financing structures—which pool loans or receivables and convert them into tradable securities that pass through cash flows to investors. A defining feature across many of these instruments is the multi-tier “waterfall” structure, where senior tranches are paid first and junior/equity tranches absorb losses first.

Why insurers are using them

The report identifies five main drivers:

  • Yield enhancement: complex securities can offer higher spreads/excess yield versus similarly rated public corporate bonds.
  • Diversification: pooling many loans can reduce reliance on any single borrower and spread risk across sectors/regions.
  • Liability-driven investment fit: structures can be designed to better align with insurers’ long-dated liabilities.
  • Regulatory capital considerations: senior tranches can carry higher ratings than the underlying loans, potentially lowering capital charges relative to holding the loans directly.
  • Partnerships with asset managers: specialist managers can expand insurers’ access to private and structured markets.

CLOs get special mention because their floating-rate coupons can help mitigate interest-rate risk in rising-rate environments.

The trade-offs: key risks

The same structural complexity that can improve yield and tailoring also creates risk-management challenges. The report highlights:

  • Liquidity risk: liquidity varies widely by asset type and can deteriorate sharply in stress markets; agency MBS tends to be most liquid, while private structures (e.g., direct lending CLO/ABF) can be among the least liquid.
  • Valuation uncertainty: infrequent trading and complex features can make pricing more model-dependent, potentially masking volatility until markets reprice.
  • Cash-flow drivers: outcomes depend on credit risk, prepayment risk (especially for MBS), interest-rate conditions, and manager/servicer quality, plus CLO-specific reinvestment risk during reinvestment periods.
  • Correlation behavior: correlations among complex assets and with traditional assets may look moderate in normal markets but can rise materially during downturns, weakening diversification when it’s most needed.

What the report says to watch operationally

Because private and bespoke assets can lack observable trading data, the report discusses practical approaches to liquidity risk quantification, including estimating trading volume using factor-based regression proxies (e.g., trading activity and transaction cost measures) and complementing that with balance-sheet liquidity stress testing based on severe scenarios and cash-flow projections.

What comes next

This document is Phase I, a literature review of asset types, market developments, risk factors, and regulatory considerations. Phase II will add interviews with industry stakeholders to capture how firms make allocation decisions and manage governance and risk in practice.

Material

Complex Assets in Insurance and Annuity Industries

Suggested Citation

Ouyang, Lucy, Stoltzfus, Jim, Coyne, Valea, Qian, Ken, Ginghina, Florin, Ng, Fiona, Mittal, Tushar, Maka, Daniel, Park, Jie-Hee, Zumanu, George, and Boamah, Emmanuel. Complex Assets in Insurance and Annuity Industries. Society of Actuaries Research Institute, February 2026. https://www.soa.org/resources/research-reports/2026/complex-assets-insurance-annuities/

Acknowledgements

The researchers’ deepest gratitude goes to those without whose efforts this project could not have come to fruition:
the Project Oversight Group for their diligent work overseeing, reviewing and editing this report for accuracy and
relevance.


Project Oversight Group members:
Bruce Friedland, FSA, MAAA
David Elliott, FSA, CERA, MAAA
John Balbach, FSA, MAAA
Elizabeth Walsh, FSA, MAAA
Pierangelo Falcucci, FSA
Renee West, FSA, MAAA
Vladimir Krepkiy, FSA, CERA, FCA, FCIA, MAAA


At the Society of Actuaries Research Institute:
Kara Clark, FSA, Sr. Research Actuary
Barbara Scott, Sr. Research Administrator

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