A new white paper from the International Center for Law & Economics finds that life insurers with larger private credit allocations are stronger, not weaker, undermining the case for heavy-handed regulatory intervention.
Using National Association of Insurance Commissioners (NAIC) annual statement data, economists Lawrence Powell and Julian Morris tested whether life insurers with larger private credit allocations show greater signs of financial distress or insolvency risk. What they found:
“The paper’s central finding is that greater exposure to private credit is not associated with a higher risk of insurer insolvency. Using a model based on historical insurer failures and other financial indicators, Powell and Morris found no evidence that insurers with larger private-credit portfolios face greater financial weakness.
“In fact, insurers with larger private-credit allocations generally appeared financially stronger than their peers. Additional analysis suggests that result likely reflects differences among insurers themselves, rather than any direct effect of private-credit investments.”
As the NAIC actively works to change the regulations around how it treats private credit through a new Credit Rating Provider Due Diligence Framework and updated risk-based capital charges for CLOs and other structured assets, the evidence fails to support the moves, while carrying real consequences for consumers.
Private credit supports the availability and affordability of life insurance and annuity products. When regulations require those assets to become more expensive to hold from a capital standpoint, costs to consumers go up.
Powell and Morris also discuss how their data do “not support treating private credit as functionally equivalent to shadow banking or as a major source of systemic risk,” views which have framed much of this debate:
“The data do not support treating private credit as functionally equivalent to shadow banking or as a major source of systemic risk. Instead, private-credit funds appear to operate under a markedly different financial structure—one characterized by substantial equity funding, limited maturity mismatch, and relatively weak channels for transmitting losses throughout the broader financial system.”
This white paper is an important read for regulators to consider before making changes that would raise costs for ordinary Americans without evidence that it would actually protect policyholders.
Read the full white paper from the International Center for Law & Economics here.
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