- Key Insight: Life insurers have shifted nearly $2 trillion in liabilities to offshore and captive reinsurers, with states instituting new guidelines to ensure adequate oversight.
- What's at stake: State officials have adopted new rules to test private credit investments and whether insurers have capital to back policyholder claims.
- Forward look: The National Association of Insurance Commissioners is requiring insurers, through their private equity owners, to stress-test captive and offshore reinsurers against adverse market conditions.
Private credit exposure hangs over the life insurance industry like a giant question mark.
Regulators, banks, investors and analysts are trying to quantify the risks from private credit, including the impact on both insurers and policyholders, particularly if software and AI investments go south.
State and federal regulators are scrutinizing life insurers to determine how deep their investments are in private credit. The task is complicated because most insurers have formed offshore or captive reinsurance subsidiaries that are not required to disclose financial information, making accurate valuations an urgent issue.
U.S. life insurers have piled into private credit over the last decade, allocating nearly one-third of the $5.6 trillion in total assets to the private credit market, according to CreditSights, a unit of Fitch Solutions. A looming question is how much of policyholder premiums are being used by insurers' private equity parents to fund opaque, off-balance sheet investments in private credit. How much of the private credit investments are tied either to software companies or to the massive buildout of AI infrastructure such as data centers is still being sorted out and examined, analysts say.
Critics question whether captive and offshore reinsurers have enough collateral to cover policyholders' claims. That is because most insurers have transferred their liabilities—and the associated capital requirements—off balance sheet, where getting to the financials requires going through offshore intermediaries.
"We have no idea how underfunded insurers are," said Tom Gober, a forensic accountant and fraud investigator at Thomas Gober Forensic Accounting Services, in Beaver, Pennsylvania. "Why are regulators allowing insurers to underfund liabilities and invest policyholder money in risky assets?"
Over the years insurers have pushed for "zero collateral" requirements. Some states may have lower minimum requirements, ranging from $2 million to $50 million. Many reciprocal jurisdiction reinsurers are eligible to hold no capital and to use letters of credit and other financing mechanisms as collateral. Standards have generally been lower since 2017, when $250 million was the minimum requirement in a bilateral agreement that the Treasury Department's Federal Insurance Office signed with the European Union and Britain.
Iowa's Insurance Commissioner Doug Ommen said the U.S. state-based regulatory system is not passive but rather the industry is undergoing a sophisticated evolution and regulators are responding with both "guardrails and guidelines."
Iowa serves as a lead state coordinating supervision of large life insurers headquartered there, including Transamerica, Principal Financial Group, and F&G Annuities & Life.
"We have a responsibility to these companies to make sure that the market is financially strong," Ommen said.
Carrie Mears, the chief investment specialist at Iowa's insurance division, said her state is "both proactive and reactive, and it's a very constant push and pull" with industry.
"We're looking at, do we need enhancements, are there things that we're not considering?" Mears said. "I think we're going to dive deeper into some of the complexity issues and do we need to have other guidance around…complex assets?"
Banks are inextricably linked to the rise of private credit and its adoption by life insurers. Banks and insurers frequently operate in a symbiotic fashion because banks are the primary channel for distributing insurance products and provide liquidity to the private credit funds that insurers invest in.
This nexus has raised systemic concerns among regulators who are monitoring the concentration of bank loan commitments to the very funds that now compete with traditional bank lending.
Most insurers' investments are opaque because of the transfer of liabilities to offshore and captive reinsurers and, in part, because many insurers are owned by, or have partnered with, large alternative asset managers such as Blackstone, Apollo Global Management and KKR.
State regulators now routinely sit in rooms with their international counterparts from Bermuda, England, and Spain to monitor holding companies with global activities, Ommen said. Iowa also is deeply engaged with the National Association of Insurance Commissioners, a standard-setting body, and its counterpart, the International Association of Insurance Supervisors.
Cash-flow testing
Last year, the NAIC adopted Actuarial Guideline 55, to evaluate the adequacy of reserves in reinsurance transactions by requiring further cash-flow testing. The guideline was a response to more than a year of discussions regarding the opaqueness of offshore transactions. This guidance allows state regulators to address concerns that captives are being used to hide the true level of liabilities or to avoid holding adequate capital.
The first reports from insurers were due by year-end. On Thursday, the NAIC held a public meeting and disclosed that roughly 80 insurers that have ceded liabilities to reinsurers filed reports with the NAIC.
"We want to ensure that these risks are being tested," said Fred Andersen, the chief life actuary at Minnesota's Department of Commerce.
Andersen said several insurers said they had cut their reserves because they "tend to invest in higher-yielding assets, and they felt that there was justification for decreasing reserves, because the money they have on hand would be invested at higher rates and therefore a higher amount of money would be available to pay claims down the road."
Insurers also decreased reserves due to policyholder behavior, he said.
"It would have been helpful to get [information] from additional companies, but just about all the companies did perform the robust cash flow testing, which was the driving force behind the call to have this guideline be done," Andersen said.
Many analysts are trying to get their arms around the industry generally. Fitch has said the allocation of life insurers to the "recently maligned software sector…is almost a de minimis allocation." Yet, at the same time, allocations to private credit have nearly surpassed insurers' exposure to public bonds, CreditSights research found.
Vince Calcagno, head of U.S. growth at Ocorian, a global fund service provider, questioned how deep the analysis has been of insurers' private credit investments.
"There could be firms that have poorly chosen the companies to lend money to, and have also done a poor job of assessing the strength of their own financial balance sheet, and the strength of their assets to these liabilities," he said. "The risk does exist and there is probably more risk there than people know."
Historic changes
After the 2008 financial crisis, when banks stepped back from some lending, private credit filled the void.
"Private credit is more at an inflection point than a breaking point," Calcagno said, adding that "there are some really good cash-flow-positive private companies operating today."
Traditionally, life insurance carriers take policyholders' premiums and invest them in stable assets to ensure they can pay out claims decades down the road. State laws strictly mandate exactly how much cash and liquid assets must be held in reserve to match those liabilities.
In the past, the NAIC used reserving methods and formulas that were easy to compare and understand. It has moved since 2014 to a principles-based method in response to the insurance industry arguing for decades that reserve requirements were excessive, overly conservative and burdensome. Insurers also have pushed for lower-quality assets such as letters of credit to be allowed as collateral, rather than cash or highly-rated securities.
"What that means is individual states are engaged on the ground, working with the companies, describing what we're seeing in our companies with other regulators at the NAIC," said Ommen. "It doesn't always rise to the formality of discussion, but the regulatory system has a lot of direct intervention with companies."
Gober, the actuary, said it is essential that policyholders and regulators have public access to the financial statements of offshore and captive reinsurers to understand their reserves. The new guideline for cash-flow testing relies on the parent of the insurer to provide the financials, he said. Of the $2 trillion in reinsurance, Gober estimates that roughly $600 billion is in domestic captives and $1.3 trillion is offshore.
Over the past decade, states such as Vermont and South Carolina have embraced the idea of allowing large businesses to self-insure their own risk through state-led captive reinsurers. The captives are often specialized entities, such as special purpose financial captives.
Known and unknown risks
Using retiree' annuities to invest in private credit raises all sorts of questions about risks, said
Cliff Rossi, a finance professor at the University of Maryland's Robert H. Smith School of Business and a former chief risk officer at Citi.
"Given all the volatility of late in private credit, increasing investment by insurers in illiquid assets may at some point become problematic," said Rossi, adding that is "why NAIC may need to take a closer look at this activity."
The NAIC said it is unclear how policyholders can find out if their insurer is fully or even partially collateralized. Policyholders would have to review financial ratings, examine state insurance department filings, and check if their insurer uses collateralized reinsurance. They can also ask to speak to their bank representative who sold them the insurance or annuity product.
In May, Treasury Secretary Scott Bessent seemed to sound the alarm by
In early June, Federal Reserve Vice Chair for Supervision Michelle Bowman said federal regulators are trying to get their arms around how much
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