By R.J. Lehmann

Life insurers are putting more money into private credit, and regulators claim the increasingly complex investments are making it harder to assess the risks behind their promises to policyholders. The concern is that hard-to-value assets could conceal losses and leave insurers unable to pay claims.

Regulators do need better information about those potential dangers. But they should hold off on imposing new restrictions that could make insurance and retirement products more expensive until they have it.

Private credit means lending outside public debt markets, often through privately negotiated loans. Insurers have made such loans for decades. What has drawn renewed scrutiny is the growth of investments whose underlying borrowers, financial structures, and credit quality can be difficult to evaluate. Two recent papers identify gaps in oversight as well as incentives that could leave taxpayers sharing the cost of insurer failures. Both deserve attention, but neither justifies treating complexity itself as proof of systemic risk.

The National Association of Insurance Commissioners (NAIC), which helps to coordinate state insurance regulation, is already moving forward on a plan to strengthen oversight of life insurers’ financial strength through closer scrutiny of ratings, valuations, and reinsurance arrangements. Ideally, it will also help regulators determine where additional safeguards are needed.

The NAIC’s own analysis of insurers’ private-credit holdings helps put that task in perspective. U.S. insurers held an estimated $1.2 trillion in private credit at year-end 2025, but that broad category includes longstanding investments with relatively straightforward structures and credit risks. The categories drawing particular scrutiny—privately rated bonds, business development companies, and private-credit funds—account for $544 billion, about 6% of insurers’ cash and invested assets. Regulators should examine the risks within those holdings before drawing conclusions from the larger headline figure.

That examination should also distinguish among investments that are hard to evaluate, investments that are hard to sell, and loans that borrowers may fail to repay. These risks can overlap, but each poses a different challenge to an insurer’s ability to pay claims. Better reporting should help regulators determine whether existing capital and liquidity safeguards adequately address them.

Alongside those questions about investment risk is a separate question about who bears the losses when an insurer fails. Legal scholars Pranjal Drall and Andrew Granato examine how state guaranty funds may subsidize risk-taking. State guaranty associations assess surviving insurers to help cover failed insurers’ obligations to policyholders. State tax credits can reimburse those companies over time, shifting costs to taxpayers through lost revenue.

But those assessments generally reflect premium volume, rather than the risks insurers take. Making competitors and taxpayers absorb some failure costs weakens insurers’ incentives for caution. Risk-based assessments and a prospective phaseout of tax credits, while honoring existing commitments, would address that problem directly. These reforms could strengthen financial discipline regardless of which investments an insurer holds.

Drall and Granato also propose additional capital requirements for complex investments and escalating restrictions on rating providers whose assessments regulators repeatedly reject. But flawed guaranty-fund incentives do not, by themselves, establish that private credit makes insurers less able to pay claims, or that complexity alone warrants higher capital requirements.

Charging insurers for the additional examination costs their investments impose makes sense. Any broader restrictions should depend on what those examinations reveal. The same principle applies to rating agencies. Insurance commissioners can misjudge risks just as much as rating agencies can, so disagreement alone should not trigger penalties. Regulators should judge ratings providers by how reliably they predict losses, using clear standards and meaningful appeals.

The available evidence reinforces the need for that measured approach. Lawrence Powell and Julian Morris, writing for the International Center for Law & Economics, found that insurers holding more private debt had lower estimated insolvency risk. After accounting for lasting differences among insurers, the relationship remained negative but was no longer statistically significant. The study does not establish that private debt improves solvency, but it provides no support for assuming that greater exposure weakens insurers.

There are also sound reasons for life insurers to hold investments that trade infrequently, as their obligations often stretch decades into the future. Committing money for longer periods can earn additional returns to fund those promises. Excessive capital requirements could reduce those benefits and raise prices for insurance and annuities without providing meaningful additional protection.

Concerns that private-credit losses could spread through the financial system likewise call for evidence about specific exposures. A September report from the Committee on Capital Markets Regulation estimated banks’ direct lending to private-credit funds and similar entities at $107 billion in 2025, equivalent to 4.58% of their highest-quality regulatory capital. It found no statistically reliable relationship between that exposure and two market-based indicators of systemic risk.

For insurance commissioners, the practical task is to make those exposures easier to assess. They need to know who owes insurers money, what secures the loans, how indebted borrowers are, and what dealings insurers have with affiliated companies. Access to material loan terms would help supervisors evaluate the risks, while comparable public reporting would make insurers’ financial positions easier to scrutinize.

Those disclosures should distinguish reported income from cash received. When borrowers add unpaid interest to their debt, insurers may record income without receiving money to pay claims. Financial reports should separate planned payment deferrals from concessions to struggling borrowers. Stress tests should then examine whether insurers could withstand simultaneous missed payments and policyholder withdrawals.

The same scrutiny should extend to deals with companies under common ownership, where inflated prices, excessive fees, or concentrated exposures could weaken an insurer’s finances. Regulators should assess those transactions on their merits, irrespective of ownership structure, and intervene promptly when a firm’s condition deteriorates.

These measures would give regulators a firmer basis for deciding whether more capital is necessary. Before adding requirements, they should identify where existing safeguards fall short and weigh the additional protection against policyholders’ costs. Insurers must be able to keep their promises. Every new restriction should demonstrably help them do so.

R.J. Lehmann is editor-in-chief and senior fellow with the International Center for Law & Economics.