The new US insurance regulatory rules have not yet taken effect, but the industry has already found ways to circumvent them

Source: Global Market Broadcast

This month, U.S. insurance regulators approved new capital rules targeting roughly $314 billion in collateralized loan obligations (CLOs) held by insurance institutions, aiming to strengthen protection for policyholders. However, during the four-year process of drafting these rules, the insurance industry has already found alternative investment methods to circumvent the new regulations.

Regulatory data show that from 2018 to 2022, the scale of CLOs held by insurance companies doubled. Thereafter, regulators began discussing the requirement for insurers holding CLOs to significantly increase their capital reserves to guard against loss risks, and the relative rate attractiveness of CLOs also declined. Insurance companies started to turn to other debt instruments with similar potential and risk characteristics as CLOs but not subject to the new rules. During this period, insurance companies continued to increase their CLO holdings, though the annual growth rate fell to single digits, while the total volume of structured securities backed by assets such as student loans, auto loans, and music royalties maintained a stable annual growth rate of around 10%. Some insiders noted that market expectations of strict regulation over CLOs spurred the creation of other structured securities investment channels.

This phenomenon highlights a key reason why Wall Street private equity giants are flocking to the life insurance business: unlike bank regulators, state insurance commissioners did not comprehensively overhaul capital rules after the 2008-2009 financial crisis. Currently, insurance companies controlled by private equity firms such as Apollo and KKR are major sellers of annuity products. Because their funds are held for longer cycles, these institutions can invest in complex, high-yield debt instruments, as long as regulators do not require them to maintain excessive capital reserves. However, private capital management companies are creating new debt instruments at a pace that outstrips the ability of state insurance regulators to respond—sometimes the regulatory process resembles a “whack-a-mole” game: once authorities tighten rules on one high-risk category, the capital has already moved elsewhere. Statistics show that over $1 trillion in assets of U.S. insurance institutions are parked in Bermuda.

The National Association of Insurance Commissioners stated that regulators determine their areas of focus based on the potential impact, scope, and relevance to insurers of specific investments, and adjust their attention in line with changing market conditions and risk scenarios. State commissioners may launch rulemaking procedures for non-CLO structured securities as early as this summer.

Athene, the world’s largest annuity provider, adjusted its $25 billion CLO portfolio last year while also increasing allocations to other types of structured credit, including $676 million in BBB-rated debt instruments purchased from its sister company, Apollo Global Management. These instruments are not classified as CLOs and therefore are not subject to the doubled capital reserve required by the new rules.

The new CLO rules set to take effect at the end of the year are in fact not as strict as the industry had feared in 2022. At that time, an internal memorandum warned of the need to curb “capital arbitrage” practices, noting that insurers could cut capital requirements by two-thirds simply by rearranging their investments as structured credit. Structurally, structured securities transform lower-rated debt into higher-rated tranches—the underlying asset pools are usually speculative-grade or junk-rated, but by tiering payment priorities, senior tranches often achieve investment-grade ratings. The May 2022 memorandum indicated that if insurers purchased all CLO tranches, the amount of capital required would be only about a third of that needed for holding the underlying loans directly.

The primary author of the memorandum later began developing CLO risk assessment models for the NAIC, but his team's work faced widespread industry criticism. In late summer 2022, regulators contacted the American Academy of Actuaries, which began conducting independent CLO analysis. The American Council of Life Insurers lobbied for the NAIC to use the actuaries’ proposals rather than the original team’s. Analysis showed that the initial model might “significantly increase” capital requirements for A-rated securities (a common rating for insurance company CLO holdings), whereas the eventually approved rules actually reduced capital requirements for A-rated securities. The memorandum’s author left the NAIC in November 2025 to join an insurance company.