Complex Assets Backing Insurance Reserves: CLOs, Private Credit, and RBC Implications

The American Academy of Actuaries has flagged complex assets as a 2026 priority. Insurer allocations to CLOs, private credit, and alternatives have grown to levels material to the solvency question. Here is what actuaries need to understand.

The issue is straightforward in concept but deeply technical in practice: insurance companies are increasingly investing in collateralized loan obligations (CLOs), private credit, and other alternative assets to back their policy reserves. These assets offer higher yields than traditional investment-grade bonds, but they carry risks that are harder to model, less liquid, and more opaque.

The trend has been building for a decade. In a low interest rate environment, insurers needed extra return to support reserves without increasing premiums. CLOs, private credit, real estate debt, structured settlements, and infrastructure loans offered that yield pickup. But the allocations have now grown to a point where regulators, the Academy, and the NAIC are paying serious attention.

What "Complex Assets Backing Reserves" Means

Every insurance company holds reserves on its balance sheet to pay future claims. Those reserves are backed by an investment portfolio. The company invests collected premiums into assets that generate returns and remain available to pay claims when due. Historically, the bulk of these portfolios consisted of investment-grade corporate bonds and government securities: predictable cash flows, transparent pricing, deep liquidity.

What has changed is the allocation to alternatives. Life insurers in particular have increased exposure, and private equity-owned life insurers managing large blocks of annuity reserves have been at the forefront. The total industry allocation to complex assets has reached a level material to the solvency question.

Why Regulators Are Paying Attention Now

The regulatory concern centers on three interconnected risks.

1. Valuation Risk

If you hold a private credit position that does not trade publicly, how do you mark it? The models used to estimate fair value involve assumptions about default rates, recovery rates, and prepayment speeds that may not hold during a downturn. In normal markets, these assumptions look reasonable. In a credit stress scenario, they can break simultaneously.

2. Liquidity Risk

If an insurer needs to sell complex assets to pay claims during a stress event, it may not be able to sell quickly or at the expected price. Traditional investment-grade bonds have deep, liquid secondary markets. CLO tranches and private credit positions do not. The liquidity mismatch between long-duration liabilities and less-liquid assets creates a risk that is hard to observe in calm markets but becomes acute in a crisis.

3. Risk-Based Capital Treatment

The current RBC framework was designed primarily for publicly traded securities with observable market prices. It may not adequately capture the risks embedded in complex structured products. The NAIC has been updating its frameworks, but the gap between the risk profile of insurer portfolios and the capital charges applied to them is a live issue.

Why This Is Fundamentally an Actuarial Problem

This is not just an investment team issue. Actuaries are the ones who certify reserve adequacy. When you sign a Statement of Actuarial Opinion, you are opining that the reserves are adequate and the assets backing those reserves are appropriate. If the assets are complex and harder to value, your opinion carries more risk.

What Actuaries Should Do

1. Understand the assets your company holds.

   Request the investment schedule from the finance team. Look at the allocation to CLOs, private credit, real estate debt, and other alternatives. Understand the tranches, credit ratings, and assumptions underlying the valuations. If you do not understand the assets, you cannot form an informed opinion about whether they adequately support the reserves.

2. Engage with the investment and risk management teams.

   Ask about their stress testing. What happens to asset values if spreads widen by 200 basis points? What is the liquidity profile under a stressed redemption scenario? How sensitive are CLO tranche values to changes in default and recovery assumptions?

3. Follow the regulatory developments.

   The NAIC's Financial Condition Committee and the Academy's working groups are actively developing guidance. The Academy's Life Practice Council has been particularly focused on the treatment of complex assets in reserve opinions. Staying current on these developments is part of your professional responsibility.

The Risk Scenario

The scenario that keeps people up at night is a credit downturn that causes simultaneous downgrades across leveraged loan portfolios, triggering CLO haircuts, private credit markdowns, and liquidity strain at the same time that policyholders are surrendering policies or claims are accelerating. It is a tail event, but the entire point of actuarial work is thinking about tail events.

The good news is that regulators are aware, the Academy is actively working on guidance, and the NAIC is updating its frameworks. That is the system working as designed. The question is whether the updates will be in place before the next credit cycle tests them.