State regulators should mandate public disclosure of ratings on private credit
State insurance regulators should require public disclosure of all ratings on private credit, along with explanations of how they were determined.
In the world of private credit, regulators face a stark choice about ratings. And there's just one correct answer.
I'll explain that in due course. But let's begin by setting the scene.
The capital requirements of U.S. insurance companies are primarily determined by the credit ratings of their debt investments. The higher the rating, the less capital an insurer must hold against a bond. If a rating is too generous, the insurer may not have enough cushion against possible investment losses.
In 2018, almost all ratings used by state insurance regulators were either publicly disclosed ratings or assessments by their own staff. By 2025, however, a substantial portion of debt investments were subject to private ratings.
Why does the difference matter? When ratings are publicly disclosed, market discipline helps drive reliability because assumptions, methodologies and judgments are scrutinized by investors, analysts and journalists. By contrast, private ratings avoid that scrutiny; they are obtained by the borrower, which shows them only to the insurer and the insurance regulator.
What's more, without public scrutiny, borrowers and insurers have more leeway to shop for the highest rating. The providers of public and private ratings are very different: 90% of public ratings are supplied by the three largest rating agencies, while roughly 85% of private ratings are supplied by many smaller rating agencies.
The increase in private ratings is particularly troublesome because it has happened as insurers have ramped up their investments in private credit - defined as bonds that are not publicly traded and loans made by nonbank lenders. Between 2018 and 2025, the private credit holdings of the U.S. insurance industry rose from $1 trillion to $2 trillion. In 2018, only about 5% of the ratings of private credit were private; by 2025, almost one quarter of the ratings of private credit were private.
Private credit can be useful to insurers, matching long-duration liabilities against illiquid assets. Private credit also has significantly higher annual yields than comparable public bonds - from 50 to 200 basis points within the same investment grade depending on maturities. However, these higher yields come with higher risks. Compared with public bonds of similar borrowers, private credit is harder to sell without significant discounts and more difficult to value without prices reported on daily trades.
The current insurance holdings of private credit have two especially concerning features. First, holdings of the least-liquid private bonds are highly concentrated, with 44% owned by 10 insurers. Second, a substantial amount of the private credit recently acquired by U.S. insurers is connected to their new owners - private equity and other investment firms. Insurers have been buying private credit underwritten by their new owners or issued by a company controlled by them. For example, private-equity firm Apollo now owns Athene, an insurer with $387 billion in investments - of which about three-fourths were originated by Apollo.
Back to my answer. State insurance regulators should not set capital requirements for private credit based on private ratings. The absence of public scrutiny is critical because ratings of private credit necessarily involve subjective judgments under uncertain conditions. Since private borrowers disclose relatively little information, and their bonds lack the benchmarks of traded prices, ratings of private credit must rely heavily on assumptions and models. Insurers have also moved beyond straightforward private bonds into bespoke asset-backed securities and other structured products. Each added layer of complexity widens the range of assumptions and models a rating agency can employ.
These problems with private ratings are demonstrated by a recent study examining more than $4 trillion of insurer assets. Three professors from Columbia Business School found that, within the same rating category, privately rated bonds were twice as likely to suffer credit losses as publicly rated bonds. The authors estimated that private ratings are effectively two to three notches more favorable than public ratings with comparable impairment risk. Correcting this disparity, they estimated, would require insurers to hold roughly $4.5 billion more capital each year. In another study using different methods, researchers at Imperial College in London and Indiana University concluded that correcting this disparity would require insurers to hold even more capital.
In response, the National Association of Insurance Commissioners has adopted a process to allow state regulators to challenge individual ratings. It's also developing a due-diligence framework to assess whether private ratings are mapped appropriately to regulatory risk categories. Although these are sensible steps, regulatory review is episodic, resource-constrained and inevitably backward-looking.
A simpler and more effective solution would be for state insurance regulators to mandate public disclosure of all ratings of private credit, along with explanations on how they were determined. This mandate would harness the market discipline of thousands of private-sector players, closely examining the basis of any rating of private credit.
This mandate would not add meaningful costs since issuers of private credit already pay for third-party ratings and submit supporting materials to regulators. In most cases, confidentiality of proprietary information would not be a major concern. However, if confidentiality of certain information in a private-credit rating is genuinely essential, insurers could seek a risk assessment from the regulator's own staff. Alternatively, the state regulator could accept a private rating but apply higher capital charges to reflect the absence of public scrutiny.
Even with this mandate, private credit could offer valuable financing opportunities for borrowers and attractive long-term assets for insurers. Nevertheless, state insurance regulators cannot possibly keep up with the growing volume of private credit with private ratings. Because credit ratings determine how much capital stands behind trillions of dollars in insurance policies, these ratings should be public and subject to market discipline.
Robert Pozen is currently a distinguished senior lecturer at the MIT Sloan School of Management and former president of Fidelity Investments.
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