Private credit is, in principle, a natural fit for life insurers seeking assets with long-dated contractual cash flows. Regulatory attention is therefore directed not at the asset class itself, but at whether valuation, concentration, collateral and counterparty risks remain visible as insurers access private credit through increasingly complex structures.
Insurance capital has become one of the more significant sources of funding for private credit, and the commercial logic is straightforward. Life insurers writing annuity business hold liabilities that extend over decades. Private credit offers long-duration assets, contractual income and bespoke structural protections that are difficult to replicate in public markets.
The scale is already material. The European Insurance and Occupational Pensions Authority (EIOPA), the EU’s insurance and pensions supervisor, recently put European insurers’ private credit exposure at over €520 billion, around 5% of total assets and climbing, with life insurers accounting for the bulk of it. EIOPA has not characterised the aggregate level as excessive. But its trajectory, and the routes by which the exposure is acquired, are now the subject of sustained supervisory focus on both sides of the Channel.
The question regulators are asking is not whether insurers should invest in private credit. It is whether the prudential framework can see, value and control the risk wherever it ultimately sits.
1. Why Private Credit Fits the Insurance Balance Sheet
Life insurers are structurally unlike investors who must return capital at short notice. An insurer writing annuities can predict, with reasonable confidence, when payments will fall due, and can therefore hold assets over long horizons provided their cash flows are sufficiently reliable and appropriately matched to those liabilities.
Private credit lends itself to that requirement. Loans can be structured with predictable coupons, defined amortisation, covenants and security tailored to the borrower, and can offer diversification away from public corporate bonds and into sectors where public issuance is thin.
In the UK, the Matching Adjustment permits qualifying insurers to recognise part of the spread on assets held against predictable liabilities. The Solvency UK reforms widened the range of eligible assets and introduced a faster route to include new asset features within a portfolio, subject to exposure limits and governance.
None of this makes every private asset suitable. The investment must still satisfy the relevant cash-flow, credit, valuation and capital tests. The structural point is simply that long-dated insurance liabilities are a natural home for patient capital, and appropriately structured private credit is a natural counterparty to them.
2. How Private Credit Reaches an Insurance Balance Sheet
Exposure does not arise through a single channel. An insurer may originate or acquire loans directly; invest through a separately managed account, a fund or a structured vehicle; or, in groups combining insurers and asset managers, source assets through an affiliated platform.
A further and increasingly scrutinised channel is funded reinsurance. In a typical arrangement, an insurer transfers the asset and liability risk of an annuity portfolio to a reinsurer under a collateralised contract. The reinsurer takes the premium and assumes the liabilities; collateral is posted to support the insurer’s claim should the reinsurer default. The economic effect can closely resemble a direct investment in private assets, even though the insurer’s balance sheet records a reinsurance recoverable rather than the underlying loans.
Its growth has tracked the UK bulk purchase annuity (BPA) market closely: the PRA estimates roughly 15% of new BPA business has been ceded this way in recent years, representing exposure of around £40 billion and rising. Many counterparties are offshore reinsurers running credit-focused investment strategies, and the assets backing the arrangement, which need not meet UK standards, may ultimately sit in global private credit.
That gap between legal form and economic substance is the heart of the regulatory debate. The contract is reinsurance; the risk remains a function of the counterparty’s strength, the quality of the collateral and the performance of the underlying assets.
3. Illiquidity, Valuation and Recapture Risk
Illiquidity is not, of itself, incompatible with an insurance balance sheet. An insurer with stable liabilities may hold a private loan to maturity without needing a secondary market, and that capacity to hold through volatility is precisely why insurance capital suits the asset class.
The difficulty arises when illiquidity combines with valuation uncertainty, concentration or an unexpected need to realise or manage the assets. Private loans are not continuously priced. Valuations rest on models, comparables and recoverability assumptions, and where assets are bespoke or rarely traded, deterioration in credit quality may not surface promptly in any observable mark. Concentration can accumulate quietly, by borrower, sector, manager, reinsurer or collateral pool, and exposures that appear diversified in benign conditions can correlate sharply in a broad credit downturn.
Funded reinsurance adds the distinct risk of recapture. If the reinsurer defaults or the treaty terminates, the insurer may be required to take back the liabilities and whatever collateral supports them. The prudential question is then whether the returned assets are sufficient, suitable, and capable of being managed within the insurer’s own investment and Matching Adjustment framework.
The concern here is concrete rather than theoretical. Supervisors have observed rising proportions of illiquid and private-credit-related assets in funded reinsurance collateral and warned that stress affecting similarly positioned counterparties could trigger multiple simultaneous recaptures, leaving insurers with less collateral, or lower-quality collateral, than assumed. The risk, in other words, is not merely that an asset cannot be sold quickly, but that its value, legal availability or suitability proves least certain at the very moment the insurer most needs to rely on it.
4. Why the Regulators Are Increasing Scrutiny
In the UK, the Prudential Regulation Authority (PRA) has proposed, through its consultation on funded reinsurance, to bring the capital treatment of these arrangements closer to that of economically similar directly held assets. The direction of travel is clear. On the PRA’s own estimate, capital held against a typical funded reinsurance transaction sits at just 2% to 4% of liabilities, against 11% to 15% for comparable direct investment, and the proposals would narrow that gap sharply. Alongside the higher charge comes a sharper focus on collateral security, counterparty strength, governance and the methodology for assessing credit quality. The design deliberately favours larger, well-rated counterparties posting higher-quality collateral over weaker ones.
EIOPA approaches the same territory through a wider lens, examining insurers connected to private equity groups, their shift toward private credit and illiquid assets, and their use of third-country reinsurance, with the aim of consistent EU supervision of acquisitions, portfolio transfers, governance and ongoing risk management. International bodies have flagged the same themes: the growth of asset-intensive offshore reinsurance, affiliated-asset arrangements and increasingly complex structures as sources of risk concentration, conflict of interest and liquidity vulnerability.
Across the UK, EU and international debate, the recurring questions are consistent. Where does the underlying credit risk ultimately sit? How independently are the assets valued? Can supervisors look through the structure? Is the collateral legally and operationally available on default? And can the insurer actually manage the assets if the arrangement is recaptured?
5. What the Next Phase Means for Insurers and Private Credit Managers
Scrutiny is unlikely to sever the relationship between insurers and private credit. Insurance balance sheets remain a deep source of long-dated capital, and private markets continue to originate assets suited to long-term liabilities. What is changing is that the structure through which exposure is obtained will now bear far closer examination than the exposure itself.
For insurers, that means greater weight on asset-level data, independent valuation, concentration analysis, liquidity planning, and demonstrable capacity to manage assets following a counterparty failure or recapture. For private credit managers, insurance capital will demand more than attractive origination: assets must support regulatory reporting, cash-flow analysis, credit assessment and continuous monitoring across long holding periods. And for funded reinsurance counterparties, the collateral package becomes decisive, with eligibility criteria, valuation mechanics, concentration limits, custody, substitution rights and enforcement provisions all required to function not merely on paper but under stress.
The common thread is that operational infrastructure now sits alongside credit underwriting rather than beneath it. Reliable loan data, covenant monitoring, collateral administration and clear legal control are not secondary considerations where the assets stand behind policyholder liabilities. Private credit and insurance remain natural partners; the next phase of that partnership will be determined less by what insurers can originate or access, and more by the transparency, governance and operational control with which those assets are held.
The Altrium Team