Deutsche Bank Group AG’s Mike Earley, whose firm oversees $190 billion worth of insurers’ funds, said he knows of one smaller insurance company that’s shifted its entire bond portfolio over to four or five ETFs, for exposure to Treasuries, corporate bonds and mortgage-backed securities and high yield debt. Deutsche Bank sees insurers as significant buyers of ETFs in the future, partially given the sheer scale scale of the industry.

“You could theoretically replace your entire portfolio,” Earley said. “But there are elements of risk.”

Regulatory Approval

Of course, the new system isn’t perfect for ETF issuers. Insurance companies still have to get regulatory approval for each individual security before buying into the funds. And states may have their own limits on how much each insurer can buy -- which could be a hurdle for a number of companies, Earley said.

“You’ll have a harder time convincing your actuaries that a 30-year ETF is a perfect replacement for a 30-year bond,” because even though the cash flows may be similar, they may not always be the same, Earley said.

Bond ETFs are currently a very small part of the overall assets owned by the industry. Life insurers reported $2.9 billion worth of holdings at the end of 2016, according to a review by Fitch Ratings. But some are emerging as significant holders.

New York Life Insurance Co., for example, owns shares of the IQ Enhanced Core Plus Bond U.S. ETF, symbol AGGP, which is a mix of different credit holdings. Much of the holdings are invested for third parties, while a much smaller portion is held for the general account. The firm bought IndexIQ in 2015 to offer ETFs to retail and institutional investors. TIAA is the second-largest investor in the iShares TIPS Bond ETF, or TIP, which tracks Treasuries protected for inflation.

Placeholder Funds

Still, the use of ETFs can erode an edge that insurance companies like to highlight. Big insurers tend to hold huge sums of money for many years before claims come due, giving them a chance to get higher yields on illiquid or complicated securities that might be shunned by retail investors.

Sometimes an ETF is just the right fit, however. If an insurer wants exposure to a certain type of debt, the firm may hold a fund until its money managers can get the actual bonds.