Odd Lots · Friday, July 31, 2026
Potential reforms to address the risks of private credit within the insurance sector include valuation-based reforms to penalize opacity and complexity, moving guarantee funds to a pre-funded model similar to the FDIC, and adopting a 'source of strength' doctrine to hold insurance holding companies accountable for their affiliates' failures.
“I think there's a variety of options that the NAIC can undertake, you know, kind of in the first instance that align the downside risk with the controllers. So you can imagine, like step one could be something like valuation based reforms. I think a lot of people agree at this point that the over optimism and valuation is a structural problem, that private letter ratings are too generous, and that also just that there is an issue with trying to value private credit in the first place, because these are non tradable loans that have these bespoken terms, and so you can do a Pagouvian tax on opacity itself, where you say, like, oh, if certain kind of assets are just structurally hard to value, then we're going to impose a regulatory capital surcharge on that complexity.”
“You can also move to the guarantee fund level. You can end the tax credits that ensures get for the guarantee funds. You can move to prefunding. You can essentially you could transform it into a federal deposit insurance like system.”
“And you could apply a similar concept to an insurance holding group. So you could go to the other affiliates in any insurance group, whether it's private equity or not, and say, you know, you have to be responsible for you know, x percent of the payouts that have to go from the guarantee fund, and that would align incentives in this insolvency scenario.”