Governance Considerations for Insurers Investing in Private Credit
Check the Fine Print
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November 06, 2026
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Private credit is an alternative investment source for insurance companies. With high yields, tailored terms and liability-matched cash flows, the private credit market can complement traditional public fixed-income investments, but it comes with its own structural features and risks.
Unlike standard covenants governing fixed-income loans, private credit loan agreements often include their own bespoke provisions. These agreements can contain interconnected, sometimes conflicting, relationships among sponsors, affiliates and insurers.
Regulators have already focused on the legal, credit and governance risks inherent in private credit portfolios, and these potential conflicts have drawn their attention. As regulatory scrutiny increases, insurance companies must demonstrate that management understands the rights, obligations and risks embedded in private credit agreements.
Regulators will require insurance companies that use private credit as part of their investment strategy to look beyond a transaction’s potential benefits and practice disciplined oversight and effective governance to mitigate investment risk.
Private Credit Demands a Different Level of Scrutiny
Traditional bonds are well understood. The lack of transparent pricing, standardized disclosures, and arm’s-length issuance can make private credit deals more complex and opaque, potentially introducing novel risks that don’t appear in public markets.
While two different investments can generate comparable yields, the legal and governance risks associated with each may vary substantially. For insurers investing in private credit, the most significant risks rarely surface at the time of investment. They often emerge later, when regulatory examinations, valuation challenges or credit events test underwriting assumptions, governance processes and investment decisions.
To anticipate any potential regulatory inquiry, insurers should be aware of and be able to explain specific risks from the outset, including:
- Non-standard covenant packages
- Bespoke lender protections
- Complex borrower structures
Understanding how these provisions operate is the key to understanding the risks of a private credit investment.
Evaluating Investment Deals Under Pressure
Private credit investments may offer beneficial economic characteristics, but legal rights, governance arrangements and creditor protections deserve equal attention. Those considerations can become particularly important when an investment faces stress, competing stakeholder interests or regulatory review.
Regulator concerns often center on a key question: “How will these structures behave when investment performance diminishes or competing interests emerge?” Key risks include:
- Competing creditor rights. In public fixed-income markets, creditor hierarchies are understood and standardized. The complexity of private credit arrangements can impact the insurer’s ability to recover during a restructuring or bankruptcy. Insurers should understand their position in the creditor hierarchy and how those rights may be impacted during a restructuring or bankruptcy.
- Sponsor and affiliate relationships. The significant number of underlying relationships in private credit investments can create unforeseen downstream conflicts. Regulators seek to understand whether insurer management has assessed and modeled situations in which sponsors, affiliates and creditors have competing interests and whether their interests are protected in the event an investment becomes distressed.
- Covenant weakness and documentation gaps. In standard fixed-income investments, loan documentation provides a source of contractual protection for insurers. However, the complexity of private credit arrangements, including amendment provisions, contractual triggers and customized documentation, may undermine legal protections. Regulators want to know whether management understands its protections, has monitoring mechanisms in place and can quickly surface risks.
Why Regulators Are Paying Closer Attention
Regulators recognize that risks are inherent in any investment strategy. Their focus is on whether management understood, mitigated, managed and disclosed them appropriately. The central concern isn’t whether an investment lost money, but whether management understood the risks, evaluated conflicts, and maintained proper oversight.
The lack of market transparency, valuation uncertainty and interconnectedness of private credit markets have heightened concerns that some insurers may have overlooked potential governance and conflict-of-interest risks in pursuit of incremental yield gains.
Governance Considerations for Private Credit Investments
As private credit allocations grow, insurers must be prepared to demonstrate how risks were identified through diligence, evaluated through governance processes, escalated when necessary and monitored throughout the life of the investment.
Here are a few key considerations that investors should consider before any private credit investment:
| Issue | Regulator concern |
|---|---|
| Concentration risk | Is the private credit portfolio heavily exposed to a single borrower, sponsor, industry or asset type? |
| Valuation methodologies | Are the private credit assets’ valuations based on methodologies that are objective and defensible? |
| Risk aggregation | Has management evaluated investments at the portfolio level to determine cumulative exposure across affiliated entities, counterparties, sectors or risk factors? |
| Related-party arrangements | Has management identified overlapping interests and established controls for potential conflicts? |
| Disclosure and reporting | Can regulators accurately assess an insurer’s exposures, valuations and underlying risks in their private credit portfolio? |
| Board oversight expectations | Is the insurer’s board providing meaningful oversight of private credit strategies, not merely approving them? |
The private credit market isn’t going away. As insurance companies increase investment and exposure, their leadership will need to sharpen their governance focus. To truly manage risks and complexity, insurers will need to understand legal rights and the relationships and risks embedded in each transaction. Additionally, insurers must maintain proper governance and oversight throughout the investment life cycle.
By understanding the fine print from the outset, insurers are better positioned to demonstrate how risks were identified, evaluated and managed when market conditions change or regulatory scrutiny increases.
The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.
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Published
November 06, 2026
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