US state regulators quiz insurers on growing private credit exposure

US state insurance regulators are intensifying their examination of insurers' involvement in the private credit sector, due to mounting concerns over the risks linked to the rapidly growing asset class, according to a Wall Street Journal report quoting comments from Susan Ochs, New Jersey's acting insurance commissioner. During a National Association of Insurance Commissioners (NAIC) summer conference, Ochs disclosed that state regulators have been engaging in confidential dialogues with insurers to gain a more comprehensive view of how major investors evaluate risks within their private credit portfolios.

These discussions aim to enhance regulators' capacity to monitor potential weaknesses across the insurance industry. Private credit has emerged as a significant part of insurers' investment portfolios, constituting up to a quarter of total holdings, based on earlier estimates. This growing regulatory focus is set against a backdrop of heightened scrutiny of the private credit market, which has expanded swiftly as insurers, asset managers, and other institutional investors chase higher returns beyond conventional public bond markets.

Regulators are especially concerned about the adequacy of current supervisory frameworks in assessing risks related to privately originated loans, where valuations can be less transparent, and assets are typically less liquid than publicly traded debt. This issue has also garnered attention at the US Treasury, with Treasury Secretary Scott Bessent questioning state insurance commissioners in May about the sufficiency of existing regulatory tools to evaluate insurers' private credit exposures.

The NAIC has independently conducted a private assessment of the insurance sector's aggregate exposure to private credit. For private equity and private credit managers, the regulatory attention underscores the increasing role of insurers as a capital source. Life insurers, in particular, have become substantial investors in private assets due to the long-term nature of their liabilities, which can align well with private credit investments.

However, this increased reliance on insurers as a funding source could also lead to heightened regulatory oversight of private-market assets, particularly concerning credit quality, valuation methods, liquidity, and concentration risk.