For a long time, insurance companies have been predictable investors. They bought government bonds, held high-grade corporate debt, and focused on stability. If there was one part of the financial system that did not chase trends, it was insurance. That is starting to change — slowly, but meaningfully.
Over the past few years, insurers have been moving deeper into private credit and alternative assets. It is not always obvious from the outside, but the scale is growing. Deals like American International Group partnering with CVC Capital Partners, or increased activity from firms such as Oaktree Capital Management, are part of a broader pattern.
Insurance capital is flowing into areas that used to be dominated by banks or specialised lenders. That raises a slightly uncomfortable question: are insurers still playing it safe, or are they quietly stepping into the world of shadow banking?
It’s not just about chasing yield
At first glance, it is easy to say insurers are just looking for better returns. Bond yields have been low for years. Naturally, they are exploring alternatives. But that explanation only tells part of the story.
According to Dr Jassem Alokla, Senior Lecturer in Finance at ARU, England, United Kingdom, the shift is being driven by a mix of factors rather than a single trigger.
“All three — opportunity, necessity, and competitive pressure are at work,” he told International Finance.
There is definitely an opportunity element. Private credit tends to offer higher spreads than public bonds, partly because these investments are less liquid and often more complex. For insurers willing to hold assets long-term, that premium is attractive. Still, the bigger issue is structural.
Life insurers, in particular, are always trying to match long-term liabilities, things like annuities, with assets that generate predictable cash flows. In a world where traditional bonds do not always deliver enough return, that becomes harder to do. So, they look elsewhere.
“Insurers aren’t just chasing yield. They’re trying to close an asset-liability mismatch problem,” Alokla explains.
There is also the fact that banks have pulled back from certain types of lending since the 2008 global financial crisis. That gap didn’t stay empty for long. Private credit funds stepped in, and insurers followed, often through partnerships with asset managers.
In a way, insurers did not just decide to enter private markets. The market shifted, and they adapted.
The shift is real, but not dramatic yet
It would be easy to assume insurers are rapidly abandoning bonds, but they are not. Traditional fixed income still dominates portfolios. Government bonds and investment-grade corporate debt remain the core. That has not changed overnight.
What has changed is the mix within that core. There is a gradual move away from purely public bonds toward private credit, infrastructure debt, and real estate lending. It is not always visible unless you look closely at portfolio breakdowns, but the direction is clear.
Alokla describes it as ‘material and rising’, but not something that overturns the whole system.
Derek Guo, Chief Legal Officer at MetLife China, sees it as even more measured.
“It is not a significant shift, but a very slight move. Life insurance is still focused on steady and long-term return,” he told International Finance.
That difference in tone is interesting. It shows how this trend isn’t being experienced in the same way everywhere. In some markets, it feels like a meaningful evolution. In others, it still looks like a small adjustment. The truth is probably somewhere in between.
So…is this shadow banking?
This is where things get a bit more complicated. If you look at what insurers are actually doing, lending to companies through private credit, structuring deals, working with asset managers, it starts to resemble activities traditionally associated with banks.
Or, more precisely, with what’s often called shadow banking. Alokla acknowledges that similarity, but with a caveat.
“Partly, in a functional sense. Their private-credit intermediation resembles shadow banking,” he says. But he’s careful not to overstate it.
Insurers don’t take deposits. They operate under strict solvency rules. They’re regulated very differently from banks and most non-bank lenders. While the activity may look similar, the framework around it isn’t the same.
Guo takes a firmer stance, especially from a Chinese perspective.
“I don’t think so. Insurance is a highly regulated industry, and capital invested in private credit is closely monitored with public disclosure,” he added.
He also points out that regulators impose limits on how much insurers can invest in these areas.
So, whether insurers are part of the shadow banking system depends on how you define it. If you focus on what they do, the comparison holds. If you focus on how they are regulated, it becomes less clear.
The risks aren’t always obvious
One of the challenges with private credit is that the risks don’t always show up immediately. Unlike publicly traded bonds, these assets aren’t priced every day. Valuations often rely on internal models. That can make portfolios look stable, even when underlying conditions are changing.
“Transparency is uneven. There is a real risk of valuation error,” Alokla said.
That does not mean insurers are ignoring risk. Many have built sophisticated systems to manage these exposures. But across the sector, the level of transparency and consistency can vary.
Liquidity is another issue. Private credit is not easy to sell quickly. In normal conditions, that is fine — insurers typically invest for the long term. But in stressed scenarios, it can become a constraint.
At the same time, the structures themselves are becoming more complex. As insurers go deeper into private markets, they are dealing with layered products, bespoke deals, and sometimes indirect exposure through funds.
Guo acknowledges that the risk profile is changing.
“This will definitely increase the risks for insurers,” he says, comparing it to traditional fixed income.
At the same time, he points to safeguards, limits on concentration, strict monitoring of assets, and regulatory disclosure requirements.
What happens when things go wrong?
The real question is not how private credit performs in good times. It is what happens when things go bad. If defaults rise or valuations fall, insurers could face pressure on their balance sheets. That might show up as lower capital ratios.
There is also the issue of liquidity. While insurers are not banks, they are not completely immune to stress. Higher-than-expected policy surrenders, or other cash needs, could force them to raise funds, possibly at unfavourable prices.
Alokla points to several possible transmission channels, valuation markdowns, liquidity strain, and broader financial linkages.
“Interconnectedness can amplify shocks,” he says.
Still, he emphasises that insurers generally have strong capital buffers. They are not starting from a weak position. Guo, speaking from a legal perspective, keeps it more straightforward.
“We have solvency ratios strictly monitored by regulators,” he added.
In other words, the system is designed to absorb stress, even if the risks are evolving.
What about policyholders?
For most people, the real concern is not how insurers invest. It is whether those investments could affect payouts, savings, or retirement products. The short answer is: not immediately.
If private credit investments underperform, the first impact is usually on insurers themselves, their earnings, their capital, and their margins.
Only in more extreme scenarios would it start to affect policyholders directly. Alokla explains that modern insurance frameworks are built with buffers.
“The risk is not zero, but protection is substantial,” he noted.
Still, as insurers take on more complex assets, the margin for error narrows. It becomes more important that risks are properly understood, and managed.
Regulators are watching, but still catching up
Regulators aren’t ignoring this shift. In fact, across different regions, there’s growing attention on private credit exposure, valuation practices, and systemic risk. But keeping up isn’t easy.
“Data and valuation gaps persist,” Alokla notes.
Private markets are, by definition, less transparent than public ones. That makes oversight more challenging. Guo, again, offers a more confident view from China.
“I think the regulator is closely monitoring liquidity and solvency. The current framework can guide investment strategy,” he added.
That difference highlights something important: regulation isn’t uniform. The risks, and how they’re managed, can vary significantly depending on the market.
Temporary shift or something bigger?
So, is this just a response to current conditions, or something more permanent? There’s no single answer.
Alokla leans toward a longer-term view. The combination of low yields, evolving liabilities, and growing private markets suggests this trend isn’t going away anytime soon. The role of insurers in credit markets is expanding, even if gradually.
Guo is more cautious.
Both views make sense. Market conditions clearly played a role in accelerating the shift. But once insurers build capabilities in private credit, and start relying on those returns, it’s not always easy to step back.
A quiet transformation
For now, insurers still look like what they have always been: stable, conservative, and heavily regulated. But underneath, things are moving. They are allocating more capital to private markets. They are partnering with asset managers. They are stepping into spaces once dominated by banks.
It’s not a dramatic transformation. There’s no sudden break from the past. But it is a shift, and one that could reshape how credit flows through the financial system.
Whether that makes insurers more resilient or introduces new risks is still an open question. What is clear is that the line between traditional insurance and shadow banking is no longer as sharp as it once was, and that is quietly becoming one of the more important changes in global finance.