What Actually Happens When a Life Insurer Fails (It's Worse Than a Bank) | Pranjal Drall and Andrew Granato on How Private Equity Turned Life Insurance Into a Taxpayer Backstop

The life insurance industry is increasingly socializing losses, creating a significant risk for taxpayers, who may ultimately bear the burden of insurance insolvencies linked to excessive private credit exposure. Private equity ownership of life insurance assets has skyrocketed from approximately $23 billion in 2009 to around $700 billion by the end of 2024, with these firms controlling between 8 to 14 percent of life insurance assets.

Private equity firms favor financing buyouts through life insurance companies, allowing them to invest in illiquid and opaque assets. This trend raises concerns about a potential race to the bottom in incentives, as life insurers cannot enter bankruptcy proceedings, leaving policyholders vulnerable during insolvencies. State-level regulations lead to fragmented insolvency processes, often capping payouts around $250,000 or $300,000, which can leave policyholders fighting for their money.

The guarantee fund, funded by surviving insurers based on premium volume, acts as a taxpayer bailout mechanism when an insurer fails. Tax credits in 44 states further shift the financial burden of these bailouts from insurers to taxpayers. The current regulatory framework inadequately penalizes riskiness, as assessments for bailouts are based on premium volume rather than the actual risk profile of insurers.

Private equity is reshaping life insurers' portfolios, moving from traditional corporate bonds to riskier private credit loans and structured products. This shift raises questions about the integrity of ratings agencies, which may provide favorable ratings due to misaligned incentives. The use of shadow re-insurance by private equity-linked insurers amplifies untracked risks, while captive re-insurers can lead to undercapitalization and conflicts of interest.

Life insurers can also transfer assets to jurisdictions with lenient capital requirements, increasing their leverage significantly. Some insurers in Bermuda have leveraged up to 50 to 1, heightening their sensitivity to major credit events, with 15 percent of their balance sheets now in private credit. Funding agreement backed notes (FABNs) allow institutional investors to lend to private equity-owned insurers, but their structure can create fragility, especially if creditors demand simultaneous withdrawals, risking a run on the insurer.

Pranjal Drall addresses the misconception that life insurance companies are immune to financial crises, noting that while funding is generally stable, the potential for failure exists, as seen with Executive Life's risky investments. He highlights the prevalence of mass shadow reinsurance transactions and clarifies that private equity's involvement in insurance is often misunderstood, with Apollo asserting that private equity ownership of insurance companies is technically incorrect.

Drall points out that Athene leads the FABN market, having executed $35 billion in funding agreements in 2025, and is a major owner of mortgage loans. He argues that private equity firms, controlling around $300 billion in insurance assets, have sharper incentives that regulators fail to adequately evaluate, although he acknowledges that policyholders may not always be exploited.

Andrew Granato calls for a more robust insolvency regulation system to replace the existing insurance guarantee fund system, suggesting that insurance holding companies should be liable for guarantee fund assessments. He criticizes current corporate law for allowing these holding companies to evade covering losses from their insurance entities and notes that the source of strength doctrine in banking is not effectively enforced.

Granato warns that the risk in the life insurance system is escalating, predicting an annual increase in the likelihood of significant macro events due to highly leveraged insurers. He highlights a lack of scrutiny on smaller insurers and raises concerns about the use of insurance company assets for loans to high-profile figures, such as the Dodgers and LeBron James.

Drall expresses concerns about the regulatory regime's ability to monitor affiliate transactions, noting that nearly half of insurance companies' assets are tied to their owners. He cites discrepancies in reporting affiliate transaction shares that can reach as high as 30 percent, underscoring the need for improved regulatory oversight. The discussion concludes with a cautionary note about the risks associated with opaque loans, referencing a loan in the Guggenheim universe that dropped to seventy-three cents on the dollar.