Private credit now accounts for approximately $1 trillion—or about 17%—of the invested assets held by life and annuity companies. Because these instruments are traded outside the traditional commercial banking system, federal entities like the Treasury Department and the SEC have raised concerns regarding asset concentration and the potential for systemic, cascading default risks.

In addition, a 2024 NAIC study revealed that ratings on insurers’ private credit investments were frequently inflated compared to the conservative standards regulators prefer. Auditors are heavily focusing on these holdings to ensure insurers are not aggressively chasing yields at the expense of sound underwriting and solvency.

The NAIC’s Principle-Based Bond Project (PBBP) completely overhauled the statutory accounting principles governing how fixed-income securities are defined, analyzed, and classified. Finalized in 2024 and effective as of January 1, 2025, the PBBP places a heavier emphasis on a security’s underlying structure, with strict definitions particularly aimed at asset-backed investments (ABIs) and pooled vehicles.

For statutory reporting, the PBBP provides a much more refined, focused process. It demands that insurance constituents and their investment advisors strictly justify an instrument’s classification as a debt security, closing loopholes previously used for complex private credit instruments.

Nearly half of the insurance industry’s private credit investments carry a private-letter rating—a grade obtained directly from an external Credit Rating Provider (CRP) like S&P, Moody’s, or Fitch. While the NAIC Investment Analysis Office—specifically the Securities Valuation Office (SVO)—utilizes these external ratings to supplement their work, the SVO retains the final say over the assigned NAIC credit rating.

The “rating notch” issue refers to findings that CRP-assigned private ratings often run several notches higher (more lenient) than what the NAIC would independently assign. Because external rating agencies are compensated by the issuers, statutory audits closely monitor these discrepancies to guard against ratings inflation and ensure asset valuations match regulatory conservatism.

The insurance industry utilizes a robust, multi-layered self-governance toolkit developed over decades of market upheavals to sedate solvency impacts:

• Asset Valuation Reserve (AVR): A mandatory, formulaic credit loss reserve required for all life insurers. It acts as a proactive buffer backstop against downward market fluctuations and investment impairments.

• Risk-Based Capital (RBC): Implemented in the mid-1990s, RBC monitors asset and interest rate risk (which accounts for roughly 80% of a life insurer’s RBC calculation).

• Own Risk and Solvency Assessment (ORSA): An enterprise risk-management assessment framework required for large entities (over $500 million in direct/assumed premium, or $1 billion for groups) to evaluate internal solvency under stressed scenarios.

• State Guaranty Associations: Coordinated via NOLHGA, these provide a secondary safety net to protect policyholders in the event of an isolated corporate failure.

The Treasury Department has no direct regulatory authority over the insurance industry, which remains strictly governed at the state level. However, Treasury Secretary Scott Bessent initiated regular, sustained consultations with insurance regulators starting in the second quarter of 2026.

Treasury officials are actively seeking feedback on high-level risk factors, including:

1. The consistency and accuracy of private credit ratings.

2. The liquidity of private credit markets during economic stress.

3. The rising industry use of fund-level leverage.

4. The increased reliance on offshore reinsurance.

While federal intervention or regulatory control is not on the table, the existence of these high-level discussions underscores why auditors expect insurers to prove rigorous underwriting and transparency of their private market portfolios.