• Treasury engaging state regulators on private credit risks in insurance portfolios
• Withdrawn NAIC report found widespread inflation in private credit ratings
• Nearly $1 trillion of insurer assets now tied to private credit markets
• SEC scrutiny of ratings firms adding pressure on transparency and governance
• New regulatory powers allow challenges to overly optimistic private ratings 

US regulators are stepping up scrutiny of private credit exposures inside insurance portfolios, as concerns mount that risk may be understated across a rapidly expanding corner of the market.

The U.S. Treasury Department is preparing to engage directly with state insurance commissioners to assess emerging risks tied to the growing volume of private loans held by insurers.

The move follows rising unease among policymakers and investors about the resilience of private credit markets and the accuracy of how those risks are measured.

At the center of the debate is a controversial study produced in 2024 by the National Association of Insurance Commissioners.

The report found that credit ratings assigned to insurers’ private credit investments were frequently inflated, in some cases by multiple notches compared with internal regulatory assessments.

The document was later withdrawn, with the NAIC citing concerns about limited data and potential misinterpretation.

Despite its removal, the study’s findings continue to reverberate across the industry. According to people familiar with the matter, the conclusions remain a focal point for regulators as they grapple with the implications of insurers’ increasing exposure to private credit.

That exposure has grown significantly in recent years. As private credit evolved from a niche market into a major source of financing, insurers became key providers of capital, attracted by higher yields compared with traditional bonds.

Today, nearly $1 trillion of the roughly $6 trillion in assets held by US life and annuity insurers is invested in private credit, according to industry estimates.

However, the structure of these investments has raised questions about transparency and risk assessment.

A substantial portion of private credit assets carry so-called private letter ratings, which are not publicly disclosed and are available only to issuers and investors.

These ratings often play a central role in determining how much capital insurers must hold against their investments.

The withdrawn NAIC study highlighted significant discrepancies. In a sample of more than 100 investments, the vast majority of private ratings were higher than those assigned by NAIC analysts. In some cases, assets considered below investment grade by regulators were given investment-grade ratings by external firms.

This divergence has fueled concerns that insurers may be underestimating the risk embedded in their portfolios.

The issue is particularly sensitive given that state regulators rely heavily on credit ratings to assess the financial strength of insurers and ensure they maintain adequate capital buffers.

The debate has also drawn in federal authorities. The Treasury’s planned discussions with state regulators are expected to focus on recent market developments, risk management practices, and the outlook for private credit.

The initiative reflects broader concern in Washington about the potential for stress in private markets to spill over into the financial system.

Tensions are further heightened by scrutiny of ratings providers. Egan-Jones Ratings, identified as a frequent provider of private ratings, has faced questions from the Securities and Exchange Commission over its ability to consistently produce reliable credit assessments.

The firm has defended its track record, saying its ratings have been accurate predictors of performance.

Industry participants remain divided on how to respond. Some regulators have pushed for greater authority to override private ratings when they appear overly optimistic.

That authority was granted earlier this year, allowing NAIC analysts to challenge ratings that deviate significantly from their own assessments.

Others, including some lawmakers, have warned against expanding regulatory intervention. Critics argue that overriding ratings could introduce uncertainty and reduce transparency, potentially disrupting market efficiency.

State insurance commissioners maintain that they already have tools to address risk where necessary.

Doug Ommen, Iowa’s insurance commissioner, said regulators have long exercised judgment when assessing investment risk. “Regulation doesn’t just stop at the door while we’re looking for ways to improve,” he said.

The stakes are high. As investors grow more cautious about private credit and redemption pressures increase, insurers could face greater scrutiny over the quality and liquidity of their holdings. Any loss of confidence in valuations or ratings could have implications for capital adequacy and financial stability.

For now, regulators and industry participants are navigating a complex landscape where rapid growth has outpaced traditional oversight frameworks.

The coming months are likely to determine whether tighter controls and greater transparency can restore confidence in a market that has become central to the insurance sector’s investment strategy.