U.S. insurers are facing greater scrutiny over their investment strategies as companies increasingly look beyond traditional bonds toward private credit, structured securities and other complex assets in search of higher returns.

The U.S. insurance market investment shift is becoming an important issue for regulators and investors because insurers must balance the need for investment income with their obligation to maintain enough capital and liquidity to pay policyholder claims.

Insurance companies are among the largest institutional investors in the financial system.

Traditionally, insurers have relied heavily on bonds and other relatively predictable fixed-income investments because those assets can provide steady income that matches long-term insurance liabilities.

But the prolonged search for attractive yields has encouraged some insurers, particularly life insurers, to increase exposure to private credit and other less-liquid investments.

Federal Reserve data cited by PwC shows that life insurers’ private-placement holdings more than doubled between 2015 and 2024, making private credit an increasingly significant part of insurers’ debt portfolios.

The U.S. insurance market investment trend creates both opportunities and risks.

Private credit can offer higher yields than some traditional fixed-income investments.

For insurers managing large pools of policyholder money, additional investment income can strengthen profitability and potentially support competitive insurance products.

However, higher returns generally come with greater complexity.

Private credit assets may be harder to value and sell than publicly traded securities.

If market conditions deteriorate, insurers could face challenges determining the true value of certain investments or raising cash quickly without accepting significant losses.

That becomes particularly important during periods of financial stress.

Insurers must maintain sufficient liquidity because policyholders can make claims regardless of what is happening in financial markets.

A property insurer facing a major catastrophe, for example, may suddenly need large amounts of cash to pay claims.

A life insurer may also face significant liquidity demands depending on policyholder behavior and the structure of its products.

The U.S. insurance market investment strategy therefore cannot focus exclusively on maximizing returns.

Capital requirements are another major consideration.

Insurance regulators use risk-based capital frameworks to evaluate whether companies hold enough capital relative to the risks associated with their assets and liabilities.

Complex securities can create additional questions about how much capital insurers should hold against potential losses.

The National Association of Insurance Commissioners has been working on regulatory approaches involving structured securities and other complex assets, reflecting concerns about whether existing capital frameworks appropriately capture the risks associated with newer investment strategies.

The issue has also attracted attention because of the growing role of private equity and asset managers in the insurance sector.

Private-equity firms have increasingly participated in insurance transactions and asset management relationships.

The business model can involve acquiring insurance liabilities and investing the underlying assets in higher-yielding securities.

That can create potential benefits through professional investment management, but it also raises questions about risk, transparency, liquidity and regulatory oversight.

Research from the Society of Actuaries highlights the growing importance of complex assets in insurance portfolios and examines issues surrounding structured securities and their implications for insurers and regulators.

The U.S. insurance market investment environment is particularly important for life insurers because their long-term liabilities can make certain private assets attractive.

Life insurance and annuity companies often have obligations extending years or decades into the future.

That can allow them to hold assets for longer periods and potentially capture an illiquidity premium.

But long-term investment horizons do not eliminate risk.

Credit quality can deteriorate, borrowers can default and market conditions can change.

Private asset volatility can also affect insurers’ capital positions.

PwC has warned that increased exposure to private credit can create concerns involving capital, liquidity and regulation if volatility or credit problems become more widespread.

For regulators, transparency is becoming increasingly important.

Publicly traded bonds have frequent market prices, while private investments can require models, valuations and third-party assessments.

That can make it more difficult to determine how quickly an insurer’s portfolio could lose value during a severe market disruption.

Credit ratings are also receiving attention.

Regulators are examining how securities are categorized and how capital charges should reflect their underlying risk.

The objective is not necessarily to prevent insurers from investing in complex assets.

Instead, regulators are attempting to ensure that capital requirements accurately reflect the risks being taken.

The U.S. insurance market investment shift could also influence the broader financial system.

Insurers hold enormous investment portfolios, meaning changes in their asset allocation can affect credit markets, private lending and demand for fixed-income securities.

If insurers continue moving significant amounts of capital into private credit, they could become an increasingly important source of financing for businesses outside traditional banking channels.

That could support corporate borrowing and economic activity.

But a major deterioration in private-credit markets could have the opposite effect.

For policyholders, the issue may seem distant from everyday insurance decisions.

However, investment performance can influence an insurer’s financial strength, pricing strategy and ability to meet future obligations.

Strong investment returns can support financial stability, while major asset losses can create additional pressure.

For now, insurers appear likely to continue evaluating private credit and other complex assets as they search for competitive returns.

The challenge will be maintaining the right balance between income, liquidity, transparency and capital strength.

As regulators refine their oversight, the U.S. insurance market investment landscape could become more closely scrutinized.

The coming years may determine whether insurers’ growing exposure to complex assets becomes an important source of financial strength or a significant vulnerability during the next market downturn.

Source: Society of Actuaries Research Institute, Federal Reserve data, PwC, NAIC regulatory developments and U.S. insurance industry reporting.