Kathmandu— Private equity firms’ increasing involvement in the life insurance industry, coupled with a surge in unregulated lending to software and artificial intelligence (AI) companies, is creating a precarious situation that could lead to insurer insolvencies and ultimately require taxpayer bailouts. A recent paper highlights how private credit funds – which have amassed $3 trillion in loans outside of traditional financial regulations – made substantial bets on the SaaS sector and AI data centers, investments now threatened by declining software valuations and concerns about an AI bubble. The structure of insurance regulations, dating back 60 years, could inadvertently socialize these losses, leaving healthy insurers and taxpayers to cover the debts incurred by private equity’s risky ventures.

The Rise of Private Equity in Insurance

Private equity firms have increasingly targeted life and annuity insurance companies as attractive acquisitions due to their steady premium income. This trend gained momentum following the 2008 financial crisis and accelerated in recent years, with PE firms seeking high fees from managing investments made with policyholder premiums. Unlike traditional insurers who primarily invest in bonds, private equity-owned insurers are more inclined towards riskier ventures, exploiting a lack of legal barriers preventing them from supporting struggling companies within their portfolios or transferring assets to affiliated entities.

Private Credit Funds and the AI Boom

Stricter regulations following the Great Financial Crisis limited traditional bank lending, creating an opening for private credit funds sponsored by investment firms – including PE firms. These unregulated funds stepped in to provide loans to companies unable to secure financing elsewhere, particularly those in the software and AI sectors. They extended multi-billion-dollar loans to SaaS businesses and the massive data centers required to train advanced AI models, fueled by expectations of continued growth and high demand. While these investments initially benefited from recurring revenue streams from software subscriptions, recent challenges to the SaaS business model are raising concerns about loan repayment.

Software Valuations Plummet, Raising Default Fears

The emergence of powerful AI code-writing models like Anthropic’s Claude has put pressure on software company valuations in 2026. These tools challenge the assumptions underlying the growth and pricing power of SaaS companies, leading investors in private credit funds to worry about potential defaults. Simultaneously, doubts are growing regarding the long-term viability of expensive data centers built to support AI development, with questions arising about whether these investments will deliver sufficient returns or become obsolete due to cheaper alternatives like Chinese AI models.

Insurance Regulations and Potential Taxpayer Burden

If private credit defaults exceed 15 percent, some insurance companies could face insolvency, triggering state insurance commissioners to intervene. Decades-old regulations designed to protect policyholders allow commissioners to require other insurers in the state to contribute to a guaranty fund that covers claims up to certain limits – approximately $300,000 for life insurance and $250,000 for annuities. Critically, in 44 states, these payments are tax-creditable over five years, effectively shifting the ultimate cost of bailing out failed insurers onto taxpayers. This creates a situation where private equity firms profit from risky investments while leaving the public to absorb potential losses.

Moral Hazard and Systemic Risk

The current system incentivizes reckless behavior by allowing private equity firms to avoid financial responsibility for their companies’ failures. The PE firm owning an insolvent insurer would not be required to contribute to the guaranty fund, creating a moral hazard where they can pursue high-risk investments with limited downside. This arrangement effectively socializes losses while privatizing gains, raising concerns about systemic risk within the financial system.

The report’s authors warn that this structure creates an unsustainable situation and calls for greater scrutiny of private equity's involvement in the insurance industry and the risks posed by unregulated private credit funds.

(With inputs from CounterPunch)

Originally published on abcnews.com.np.