A new paper on law and finance argues that the bigger threat tied to private credit is not the asset class by itself, but the model private equity firms have built through life insurers, where profits stay private while losses in a crisis may spill into the insurance system and, in part, to taxpayers.
The paper, Private Credit’s State Backstop: How Private Equity Socializes Risk Through Insurers, was written by Andrew Granato, an assistant professor of law at the University of Texas at Austin, and Pranjal Drall, a JD-PhD candidate in financial economics at Yale University. The authors examine the institutional risks behind the rapid rise of private credit through the lenses of law, financial regulation, and insurance rules.
Life insurers as a funding engine for private equity
The paper says major U.S. private equity firms such as Apollo, Blackstone, and KKR have spent more than a decade moving beyond traditional buyout funds and turning into large asset-management platforms. Life insurers fit what those firms need: long-duration and relatively steady premium inflows, policyholders who usually do not withdraw money quickly, and balance sheets that can keep allocating capital to less liquid but higher-yield private credit assets.
That has led many private equity firms to buy life insurers and use policyholder premiums as an important source of funding for private credit, while also collecting asset-management fees from the insurers themselves.
The paper’s main concern is who ends up bearing losses
The authors stress that the central issue is not private credit alone, but the fact that the risk does not remain fully inside private fund structures. A normal corporate failure would typically leave shareholders and creditors holding the loss. Life insurers, however, do not go through ordinary bankruptcy in the same way. Instead, state guaranty funds step in to protect policyholders, and those funds then assess solvent insurers to cover the cost.
The paper argues that the burden does not necessarily stop there. In many states, insurers are allowed to offset those assessments against future state taxes. As a result, what appears to be an industry-funded rescue can partly migrate to public finances.
Why conservative insurers may subsidize riskier rivals
The authors criticize the way guaranty fund costs are allocated, saying the formula is generally tied to premium volume rather than the level of risk taken by each insurer. In practice, that can force a conservatively run insurer to absorb part of the collapse cost of a competitor that made much more aggressive private credit allocations.
In the paper’s view, that setup creates a classic moral hazard problem: some firms can take on more risk without fully internalizing the downside if the strategy fails.
Opaque assets and harder supervision
The paper also says private credit is far less transparent than publicly traded bonds, making it harder for regulators to track real-time values. It lists several practices commonly seen in private fund structures:
- charging high management fees through affiliated entities
- moving underperforming assets onto insurers’ balance sheets
- expanding exposure to private credit assets with limited valuation transparency
- using shadow reinsurance to reduce outside visibility into real risk
- relying on private credit ratings to lift stated asset values
Those features, the authors write, can leave insurers looking healthier on paper than they really are.
Reform proposals focus on the system, not a blanket ban
The paper does not argue that private funds should be barred from investing in insurers, nor does it reject the value of private credit itself. Instead, the authors call for changes to the regulatory design: greater transparency in private credit valuation, stronger disclosure for shadow reinsurance, guaranty fund charges based on risk rather than size alone, limits on affiliate self-dealing, removal of state tax offsets tied to guaranty fund assessments, and, if needed, a return of federal systemic-risk oversight for large insurance groups.
The paper ends with a warning that insurance law is becoming a key institutional support behind the rapid expansion of private credit. If regulators do not adjust the framework early, hidden risks may eventually be borne by the broader financial system and by taxpayers when markets come under real stress.