Insurers double down on private credit, regulators sound alarm
The gist
Insurers are piling into private credit for juicier yields, but regulators warn the sector is sprinting into risky, complex territory with its eyes half closed.
What to know
- Over 65% of U.S. insurers and 74% in Canada plan to boost private credit allocations within two years, led by giants managing $25 billion or more.
- Despite the rush, just 17% of U.S. insurers say they have enough in-house expertise to manage these complex investments, exposing a major skill gap.
- Regulators are raising red flags over opaque valuations, liquidity risks, and the potential for systemic shock as redemption caps and regulatory gaps come under the microscope.
Private Credit Goes Mainstream
Insurers are transforming private credit from a niche play into a core portfolio pillar, but a lack of in-house expertise and market fragmentation threaten to undermine this strategic shift.
A decisive majority of insurers worldwide, including 65% of US firms and 74% of Canadian insurers, are set to increase their private credit allocations over the next 12 to 24 months, marking a pivotal shift in institutional investment strategies. This trend, highlighted by a Marsh survey of 123 insurers managing over $4 trillion in assets, underscores private credit's evolution from a niche holding to core portfolio infrastructure, driven by attractive yields and diversification benefits that surpass traditional public bonds. Notably, 81% of insurers with assets exceeding $25 billion are leading this charge, signaling that scale and market maturity are key factors in embracing private credit as a strategic income source amid volatile macroeconomic conditions.
Despite growing enthusiasm, insurers are increasingly selective in their private credit investments, focusing on higher-quality segments such as investment-grade direct lending, private placements, and asset-backed finance rather than venturing into riskier corners of the market. This cautious approach reflects widespread concerns about deteriorating underwriting standards, rising default rates, and the complexities of payment-in-kind structures, prompting insurers to prioritize robust lender protections and portfolio diversification over mere yield chasing. As KKR emphasizes, the emphasis is on durable cash flows and high-grade credit, reinforcing private credit's appeal as a resilient income source rather than a speculative gamble.
While insurers are motivated by the pursuit of higher yields and a strategic pivot away from public bonds, many face significant challenges due to limited in-house expertise and fragmented market infrastructure. Surveys reveal that only 30% of insurers globally—and a mere 17% in the US—possess the internal capabilities necessary to effectively research and allocate capital to private credit, a gap that disproportionately affects smaller firms amid a highly fragmented insurance landscape with hundreds of entities. This expertise deficit raises concerns about the ability of many insurers to responsibly manage private credit portfolios, underscoring the need for enhanced operational frameworks as the asset class becomes a defining theme in insurance investment strategies.
The geographic and sectoral expansion of private credit investments further illustrates insurers’ broadening allocation strategies, with North American insurers notably more inclined toward investment-grade structured credit compared to their European and UK counterparts. This regional disparity reflects differences in market maturity and regulatory environments, as evidenced by Apollo's ambitious plan to deploy up to $20 billion in private credit opportunities in Mexico targeting infrastructure and other debt transactions. Such moves highlight private credit’s growing role not only as a source of income and diversification but also as a dynamic engine fueling cross-border and sector-specific investment growth within the insurance industry.
Hidden Risks and Illiquidity
Opaque valuations, limited transparency, and illiquid markets expose insurers to significant credit and liquidity risks that could jeopardize their ability to withstand market shocks.
Insurers venturing deeper into private credit face pronounced credit risk challenges, as underlined by the necessity for rigorous underwriting and deal structuring to mitigate risks from business underperformance, sector pressures, and elevated leverage ratios. Eryn Bacewich highlights the criticality of discerning seasoned managers from 'tourists' in this space, emphasizing that underwriting discipline, investment committee rigor, and workout experience are paramount to navigating the complex credit landscape effectively.
Liquidity risk remains a formidable obstacle given private credit’s inherent illiquidity and limited secondary market, which contrasts starkly with the daily tradability of public bonds. Investors must carefully align their liquidity needs with fund terms, understanding that limited redemption features, while challenging, are not inherently negative. However, during market stress, as S&P’s stress tests reveal, insurers could struggle to liquidate sizable private credit holdings, potentially jeopardizing their ability to meet pension payouts amid economic downturns.
The opaque nature of private credit investments, often classified as Level 3 assets and marked to model rather than market, complicates valuation and risk assessment for insurers. This opacity, coupled with limited disclosure on borrower details and sector exposures—as seen in portfolios of Legal & General, Standard Life, and Just Group—raises systemic concerns about hidden losses and the true risk profile of insurers’ growing private credit allocations, prompting regulatory scrutiny and calls for enhanced transparency.
Beyond credit fundamentals, insurers grapple with significant headwinds including regulatory complexity, governance challenges, and the health of adjacent private equity markets, which collectively add layers of risk to private credit investments. According to a Marsh survey, 42% of insurers cite regulatory challenges and 37% liquidity concerns as major obstacles, while 66% worry about a shrinking illiquidity premium and 54% flag deteriorating underwriting standards. This confluence of factors underscores the pressing need for enhanced in-house expertise, yet only 30% of insurers globally—and a mere 17% in the U.S.—report sufficient capability to manage these complexities internally.
Regulatory Gaps Fuel Moral Hazard
Weak oversight and structural flaws in insurance regulation are enabling riskier private credit bets, raising fears of systemic contagion and moral hazard in times of stress.
Regulators are increasingly scrutinizing private credit investments by insurers, focusing on opaque valuation practices, complex loan structures like payment-in-kind (PIK) interest, and liquidity risks inherent in semi-liquid funds. For instance, Cliffwater LLC and Partners Group have recently imposed redemption caps after facing redemption requests exceeding 5% of net asset value, highlighting liquidity management challenges. This heightened oversight reflects concerns about credit quality and transparency amid the growing interconnectedness of private credit managers, insurers, and banks, as detailed in EY’s 2026 report.
The migration of private credit risk from the regulated banking system into insurers exposes regulatory gaps and potential arbitrage, as insurers operate under a relatively lenient framework with less creditor scrutiny due to their dispersed retail policyholder base. This shift, originally intended to isolate risky assets from taxpayer-backed bailouts post-2008, now raises systemic concerns because insurers’ long-dated liabilities and patient capital make them natural holders of illiquid private credit, yet the regulatory environment remains 'held together by Scotch tape,' with opaque valuations and rating inflation complicating risk assessment.
Structural features of insurance regulation, such as guarantee funds that assess premiums solely on volume rather than risk, create implicit subsidies that may incentivize riskier private credit investments. This dynamic, coupled with expectations of political and state-level backstops for policyholders in insolvency scenarios, fosters moral hazard and could trigger vicious cycles during economic downturns where insurer failures lead to assessments on peers, potentially cascading into broader sector instability.
Federal investigations into private credit exposures within insurance groups, exemplified by probes into Guggenheim-affiliated insurers like Delaware Life, underscore rising regulatory concerns over financial disclosures and affiliated asset reporting. These developments, alongside initiatives like the Financial Stability Board’s push for enhanced cross-jurisdictional reporting standards, signal an industry-wide imperative to strengthen governance, data transparency, and valuation processes to sustain market confidence as private credit becomes a more prominent component of insurers’ portfolios.
