A new summary from the International Center for Law & Economics (ICLE) highlights the regulatory alarm around private credit, and concludes that the data do not support the current panic.
Economists Lawrence Powell and Julian Morris broke down their recent research into an easy-to-read summary this week. Their headline finding is that private credit represents roughly 6% of the $9.9 trillion in life insurer general-account assets, and that more than half of all insurer groups hold none at all.
The underlying research used National Association of Insurance Commissioners (NAIC) annual statement data to test whether life insurers with greater private credit exposure show higher insolvency risk. Not only do they not – the data point in the other direction:
“Insurers with larger private-debt allocations appear financially stronger, not weaker. The analysis also finds that greater exposure to private debt is not associated with a higher estimated risk of insolvency.”
The regulatory pressure, including the ongoing work at the NAIC on Credit Rating Provider frameworks and risk-based capital charges for CLOs and other structured assets is premised on treating private credit as a bank, or “shadow banking” activity. Again, the data undercut that:
“Private-credit funds generally employ modest leverage, rely on long-term investor capital, and face limited maturity mismatch. None of this means regulators should ignore valuation challenges, data gaps, or links between banks and nonbanks. It does suggest that reforms should be targeted, evidence-based, and calibrated to actual risks, rather than driven by assumptions that private markets are inherently dangerous.”
While banks fund long-term loans with short-term deposits, life insurers hold long-duration liabilities and need long-duration assets to match them. Private credit fits that need, and should not be viewed the same way as traditional banking deposits.
Last week, Pinpoint highlighted ICLE’s white paper that concluded that life insurers with larger private credit allocations are stronger, not weaker, undermining the case for heavy-handed regulatory intervention.
The ICLE summary shows that broad restrictions or punitive capital charges could raise costs for policyholders, while not improving insurer solvency. Such moves are the opposite of what good regulation is supposed to accomplish.
Subscribe to Pinpoint Policy Institute