- Key insight: Treasury officials are investigating if insurers' pivot into private credit creates hidden, unmanageable risks for policyholders.
- What's at stake: The lack of public reporting in private debt markets has regulators concerned about whether those investments are sound, and whether they could pose a risk to financial stability.
- Forward look: A sudden downturn in private credit could force insurers to sell assets rapidly, triggering broader market-wide financial contagion.
Secretary of the Treasury Scott Bessent on Thursday met with state insurance commissioners and the National Association of Insurance Commissioners to discuss recent developments in private credit markets.
The Treasury Department said Bessent discussed the movement of U.S. life and annuity reserves to offshore jurisdictions, as well as regulatory responses from NAIC and state regulators.
"This Administration is a strong supporter of the state-based system of insurance regulation and supervision," Bessent said at the meeting. "My team at Treasury is monitoring the transformation of the U.S. life insurance industry and trends in private credit."
Bessent said Treasury is closely monitoring the growing exposure of insurers to private credit to ensure that state-based oversight remains effective. Regulators also highlighted their ongoing work to monitor private credit and protect policyholders.
Bessent emphasized the need for "fit-for-purpose regulation" that manages risk appropriately while encouraging innovation, the Treasury said in a press release.
Several giant private equity firms that manage private credit funds have experienced high redemption requests from investors. Among those that have capped or cut withdrawals are Apollo Global Management, Ares Management, BlackRock, Blue Owl Capital, and Morgan Stanley.
The Treasury Department said it will continue to hold talks with state insurance commissioners, staff and senior-level officers to discuss NAIC's work on risk-based capital, private letter ratings, offshore reinsurance jurisdictions, and the oversight of evolving business models.
The $2 trillion private credit market faces rising scrutiny due to its rapid growth and limited transparency. There are no there are public reporting requirements for private credit, leaving regulators and investors with little information to evaluate risk, analysts say.
State insurance regulators said they have long taken concrete steps to keep pace with insurers' increased exposure to private credit and ensure that policyholders are protected.
"State insurance regulators are leveraging effective oversight and enhancing risk-mitigation frameworks to promote stable markets and deliver strong outcomes for consumers," said Elizabeth Dwyer, director of Rhode Island's Department of Business Regulation Director and president-elect at NAIC, in a press release.
NAIC expertise, data, and analysis for insurance commissioners to effectively regulate the industry and protect consumers. It measures the credit risk of securities held by insurance companies using a NAIC designation rating. That rating determines regulatory capital requirements and investment limits for insurers.
This year, NAIC adopted a challenge process to so-called private letter ratings, which are confidential credit opinions issued by rating agencies for privately-placed securities. Unlike public ratings, private letter ratings are shared only with the issuer and specific investors to assess risk for non-public debt.
NAIC's challenge process culminates a multi-year effort to allowing the standard-setting body to challenge any rating to determine if it should continue to be used for assessing investment risk. NAIC has a team of 30 analysts that review individual transactions to ensure compliance with regulatory standards. No rating challenges have been processed yet. A rating challenge would have to be a "material," requiring a three-notch downgrade or more for regulators to determine if a rating needs to be changed.
NAIC is the regulatory support group governed by the top insurance regulators in 50 states, Washington, D.C. and five U.S. territories.
