> This will go WAY over the heads of slackjaw, but here’s an excellent academic paper on private equity socializing risk/privatizing profit

Abstract

Private equity (PE) firms have acquired large life insurers and loaded their balance sheets with private credit assets that are opaque and difficult for regulators to value. This Article explains how PE profits from these insurers while shifting the resulting risk onto competitors and taxpayers.

Unlike ordinary firms, life insurers do not pass through bankruptcy when they fail. Instead, when a life insurer becomes insolvent, state-based guaranty funds protect insurance policyholders by "assessing" surviving insurers to cover the shortfall. In most states, such outlays are fully creditable against state premium taxes over time, transforming an ostensibly industry-funded system into a public backstop. The result is a system that socializes losses more sharply than banking's federal deposit insurance, and does so with an insolvency and regulatory architecture that is more fragmented and less able to address macroprudential concerns. With the rise of PE's new private credit strategy, insurance's unique insolvency, tax, and financial regulation regimes now form critical components of private credit's submerged legal infrastructure.

PE firms exploit this regulatory regime by pairing life insurers with private credit to capture value from both sides. After acquiring an insurer, the PE firm earns profits in two ways: a spread between what the insurer promises policyholders and what its investments earn, and management-related fees on those investments. Guaranty funds and their accompanying regulatory regime implicitly subsidize this model in three ways. First, opacity in private credit permits insurers to appear better capitalized than their true risk exposure warrants. Second, weak incentives for policyholder monitoring permit PE to siphon gains through control of fees while shifting losses onto insurer balance sheets. Third, because guaranty-fund assessments are based on premium volume rather than risk contribution, conservatively-managed insurers (and, ultimately, taxpayers) finance the more aggressive strategies of their PE-owned competitors.

PE-owned life insurers reflect a structural transformation in which an insurer supports a broader asset-management business that is designed to extract value upfront and impose losses on others. Having traced that transformation, this Article proposes to curb the veiled subsidies for this shift with reforms that make insurance risks legible, price risk pre-failure, and allocate losses to insurance affiliated groups post-failure. Doing so would restore insurance insolvency, tax, and financial-regulation law to their policyholder-protection role.

Full paper at:

https://papers.ssrn.com/sol3/papers.cfm