What Actually Happens When a Life Insurer Fails (It's Worse Than a Bank) | Pranjal Drall and Andrew Granato on How Private Equity Turned Life Insurance Into a Taxpayer Backstop

September 6, 2026

AI Summary

5 min read

In 2009, private equity owned about $23 billion in life insurance assets. By the end of 2024, that figure had exploded to roughly $700 billion—a 30- to 35-fold increase. As of last year, somewhere between 8% and 14% of all life insurance assets in the United States are now held by companies owned or controlled by private equity firms. This transformation is the subject of a new paper by Pranjal Drall (Yale Law) and Andrew Granato (University of Texas School of Law), who argue that the life insurance industry has quietly become a system that "socializes losses more sharply than banking federal deposit insurance."

Why Private Equity Wants to Own Life Insurers

The conventional pitch for private equity ownership of life insurers is something called "permanent capital." In a typical buyout fund, private equity firms raise money from institutional investors, take out loans to acquire companies, and must return that capital to investors within a fixed period—usually a decade. A life insurance company, by contrast, collects premiums from policyholders today and pays out claims only years or decades later, when people die. That long, open-ended float gives the insurer flexibility to invest in illiquid, opaque assets like private credit without worrying about a fixed redemption date.

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What you'll learn

1 Timestamped Outline
2 (00:00) **Introducing the Paper and the Core Thesis** - Jack Farley introduces Andrew Granato and Pranjal Drall, co-authors of "Private Credit State Backstop," and lays out the central claim: the life insurance system socializes losses more sharply than bank deposit insurance.
3 (04:04) **Why Private Equity Wants to Own Life Insurers: "Permanent Capital"** - Andrew explains the strategic logic: life insurers provide a stable, long-duration pool of capital with no fixed end date, unlike a fund.
4 (08:09) **The Plausible Positive Story vs. The Dark Side** - Pranjal acknowledges the legitimate synergy: top asset managers like Blackstone and Apollo could earn better returns and pass savings to consumers.
5 (10:16) **How Insurance Insolvency Works — The Analogy to Banking** - Andrew walks through the bank resolution system (FDIC, pre-funded assessments, full faith and credit) and then contrasts it with insurance.
6 (16:15) **The Coverage Gap and the "Socializes Risk More Sharply" Claim** - Pranjal and Andrew explain why the insurance system is worse than banking.
7 (19:32) **The Regulatory Gap: Risk-Based Capital That Doesn't Work for Private Credit** - Andrew explains that while there is a risk-based capital regime, it has proven ineffective against the opacity of private credit.

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Show Notes

Andrew Granato, Assistant Professor of Law at the University of Texas at Austin, and Pranjal Drall, JD/PhD candidate at Yale, join Jack Farley to discuss their paper "Private Credit, State Backstop: How Private Equity Socializes Risk Through Insurers." Private equity ownership of life insurers has grown from roughly $23 billion in 2009 to about $700 billion by 2024, and Granato and Drall argue this has created a system that socializes losses even more sharply than federal deposit insurance does for banks. They walk through how state guarantee funds work: when a life insurer fails, its surviving rivals are assessed based on premium volume rather than risk, and in 44 states those assessments are recouped through tax credits, meaning taxpayers ultimately foot the bill without any vote ever taking place. The conversation covers how PE-linked insurers reallocate balance sheets into opaque private credit and affiliated loans, arbitrage ratings through firms like Egan-Jones and undisclosed private letter ratings, and use Bermuda "shadow reinsurance" to escape disclosure and capital requirements, with leverage reportedly running as high as 30-to-1 or 50-to-1. Jack and the guests also examine emerging run risk from funding agreement-backed notes (FABNs) and policy surrenders, using the Executive Life collapse as a historical precedent. The episode closes with the recent Guggenheim/Delaware Life/Clear Spring scandal, in which Mark Walter's insurers understated affiliated assets (including a loan to LeBron James) at 3% when the true figure was closer to 42%, prompting the sale of the Lakers to raise liquidity. Granato and Drall propose reforms including taxing opacity, banning private letter ratings, pre-funding guarantee funds on a risk-weighted basis, and making insurance holding companies partially liable for guarantee fund assessments. Recorded August 28, 2026.

Paper by Pranjal Drall and Andrew Granato, “Private Credit's State Backstop: How Private Equity Socializes Risk Through Insurers”:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=7152239

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