- Concerns are growing about the US$2 trillion private credit market.
- Most analysts say systematic risk is limited with a repeat of 2008 unlikely.
- Yet industry insiders expect the private credit-heavy reinsurance sector will feel some impact.
- This isn’t a Cayman-specific problem but the jurisdiction’s growth in reinsurance poses potential risk.
While the ongoing Iran war has dominated the recent news cycle, another situation has unfolded in the financial pages. Over the last few months, growing investor demand for redemptions has sparked fears that private credit might be a bubble that is about to burst.
Private credit is a form of non-bank lending to the corporate sector that boomed after the Global Financial Crisis in 2008 made it more difficult for banks to lend to mid-sized companies. The private credit market has grown from around US$300 billion in 2010 to an estimated US$2 trillion today.
On the supply side, growth in private credit was fuelled by low interest rates, which led investors to look for higher-yielding assets. Meanwhile demand was boosted by a tech boom that made fast-growing companies hungry for capital.
That tech exposure is now starting to look problematic. A high proportion of private credit loans were made to software firms that emerged in the tech boom from 2015 onwards. But this year many of those software firms have seen their share prices plummet in the so-called ‘SaaS-pocalypse’. The reason for the fall is the fear that AI can replicate many of the services of these software companies, for a fraction of the cost for the consumer.
AI’s low consumer cost is also a potential threat to the AI firms that have been spending record amounts to build AI infrastructure. Fears are starting to grow that AI companies may struggle to get sufficient return to cover that infrastructure investment. And that’s another red flag for private credit, which has also lent lots of money to AI firms.
No repeat of 2008
Private credit’s problems sound worryingly similar to the beginnings of the 2008 crisis. The good news is that most credible research suggests that even the worst possible private credit bust is unlikely to cause a wider financial crisis. Banks have limited exposure to private credit and that means a blow-up wouldn’t be passed on to the wider banking system.
“In 2008 there were illiquid securities, hard-to-mark assets, but they were inside the banks,” said Alfredo Mordezki, a former portfolio manager for Santander Asset Management. “This harmed interbank lending – banks were toxic because you couldn’t value these securities. Now, the securities are owned by institutional investors, pension funds, family offices, so the system (and depositors) seem safe.”
Instead, if the private credit situation does get worse, then the impact could be focused on specific industries that have concentrated exposure. The bad news is that one of those industries is reinsurance.
Reinsurance risk
By 2023, private equity firms owned insurance companies that held 10.1% of all assets in the US life and annuity market, up from less than 0.1% in 2012. One reason private equity firms like to buy insurance companies is because the premiums paid by policyholders provide a steady stream of capital to finance investment strategies, one of which is private credit.
As a result, insurance companies have massively increased their exposure to private credit. According to Toby Nangle writing in the FT, “private credit now accounts for more than 35% of total US insurer investments and close to a quarter of UK insurer assets”.
“Yes, the private credit downturn will have an impact on the reinsurance industry,” said a Cayman-based reinsurance C-Suite executive who spoke to the Compass on the condition of anonymity because he didn’t have authority to speak to the press. “The tide is going out and we’re about to find out who isn’t wearing swimming trunks.”
The source noted that if the ongoing global energy shock causes a recession in the US, that would lead to more policyholders looking to withdraw from annuities, putting liquidity pressure on insurance companies and their reinsurers.
One man well-placed to judge the potential risk is Jon Macdonald, the former Group Chief Risk Officer for Royal London, RSA Insurance Group and Prudential, and the current CEO of Encina Consulting, a risk management and governance advisory firm. “This isn’t Cayman-specific, but a lot of private equity has come into the reinsurance industry, and that brings both opportunity and risk – particularly on the asset liability management side if governance doesn’t keep pace,” said Macdonald.
“The problem arises when assets are illiquid, opaque, affiliated or not independently governed,” said Macdonald. “In those cases, asset quality may not be sufficient to support liabilities.”
That view is supported by a 2025 research note from the US Federal Reserve, which said: “Partnerships between life insurers and asset managers have created complex and arguably opaque structures to increase investment returns.”
“The reinsurer’s assets are managed by an affiliated entity whose fee income depends on deploying those assets,” said Macdonald. “That creates an inherent conflict of interest.”
Indeed, a 2025 Bank for International Settlements paper found that private equity-backed insurers “have been more likely to rebalance their portfolios towards higher-risk investments, such as structured products and affiliated assets”.
“When an asset manager owns a reinsurance company, the big question is if they manage the assets of that company for the benefit of the insurance company or for the benefit of the asset manager,” said the Cayman-based reinsurance executive.
“There is nothing inherently wrong with the private equity-backed structure if it is well managed, and regulators such as CIMA are rigorous in overseeing these risks,” said Macdonald. “But it requires strong governance at both board and risk function level to ensure inappropriate asset decisions are not followed.”
The Cayman-based reinsurance executive agrees. “Well-managed reinsurance companies will get through this. It comes down to underwriting discipline, asset management discipline and having built-in flexibility that gives you access to liquidity.”
Cayman’s reinsurance sector
The massive increase in private equity-backed US insurance companies coincides with rapid growth in Cayman’s reinsurance sector, where assets have quadrupled since 2020. “Cayman’s regulatory rigour and capital standards are strong, but when capital flows in quickly, governance must keep pace,” said Macdonald.
“I’m not sure that CIMA has enough resources to regulate all the new reinsurance companies coming to Cayman,” said the reinsurance executive. “I think it does a fantastic job with the resources it has, but it needs more funding. The cost of a B(iii) licence should be higher, and CIMA should be able to pay higher salaries to attract the best talent.”
Nobody interviewed for this article felt that the private credit-reinsurance nexus was a Cayman-specific problem. Indeed, there are other offshore jurisdictions with a far heavier exposure to reinsurance. But Cayman’s growth in reinsurance means this story has more potential to impact the islands than it would have done a decade ago.
Both the Cayman Islands Monetary Authority and the Cayman International Reinsurance Companies Association declined comment on this issue at this time.
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