When I wrote in 2025 that state guaranty associations were a flimsy substitute for real insurance of annuity promises, the industry could dismiss the concern as theoretical. https://commonsense401kproject.com/2025/06/24/state-guarantee-associations-behind-annuities-are-a-joke/
It isn’t theoretical anymore.
The Federal Reserve, Treasury, IMF, Bank for International Settlements and even state insurance regulators are now wrestling with a life-insurance industry that has fundamentally changed. Insurers are holding more private credit and other illiquid assets. Private-equity firms and affiliated asset managers increasingly control insurance assets. Enormous blocks of U.S. annuity liabilities have been moved through offshore reinsurance structures, particularly Bermuda. And the state guaranty-association system standing behind these promises remains essentially the same post-failure assessment mechanism designed decades ago.
It isn’t the FDIC. It isn’t even close.
The Chicago Fed Has Now Said the Quiet Part Out Loud
A remarkably useful 2024 Federal Reserve Bank of Chicago study explains exactly how different the insurance guaranty system is from federal deposit insurance.
The FDIC is designed around a national, prefunded system capable of resolving banks quickly. State insurance guaranty associations instead operate state by state and are funded after an insolvency occurs, primarily by assessing surviving insurers. Those assessments are subject to annual statutory limits.
The Chicago Fed concludes that it is simply “unclear how the insolvency of a relatively large U.S. insurer would impact the state guaranty fund system.”
It goes further. A sufficiently large failure could require states to assess surviving insurers for many years, while benefit payments could exceed the money coming in from those assessments. Associations might then have to borrow to bridge the difference.
That is a long way from:
Your annuity is guaranteed.
A more accurate description is:
If your insurer fails, a state-created association may eventually provide statutorily limited benefits, financed largely by assessments imposed on the other insurers that have not yet failed.
The Numbers Show How Thin the Backstop Is
NOLHGA’s own nationwide data make the scale problem obvious.
Its November 2024 report showed nationwide annual assessment capacity in 2023 of approximately:
| Account | Reported annual capacity |
| Life | $4.08 billion |
| Allocated annuity | $7.53 billion |
| Unallocated annuity | $73 million |
| Health | $8.47 billion |
| All categories combined | $20.16 billion |
Those numbers are not a giant pool of cash sitting in a vault waiting for claims. They are principally the statutory capacity to assess insurers after failures occur.
For perspective, Federal Reserve data show that U.S. life insurers’ general accounts alone held about $7.53 trillion of financial assets at year-end 2025.
I would not claim that the $20 billion capacity should equal $7.5 trillion of insurer assets—the two numbers measure different things. But the comparison demonstrates the magnitude problem. The supposed backstop is tiny relative to the insurance balance sheets it ultimately stands behind.
And annuity protection is capped at the individual-policy level as well. NOLHGA itself gives the example of a $300,000 annuity in a state with a $250,000 guaranty benefit: the association guarantees $250,000, while the remaining $50,000 generally becomes a claim against the failed insurer’s estate.
That matters enormously for wealthy retirees, pension-risk-transfer retirees and institutional retirement arrangements involving benefits far above ordinary individual coverage limits.
We Already Ran the Experiment: It Was Called AIG
The best historical evidence remains AIG.
Ben Bernanke testified in March 2009 that without the federal rescue, some of AIG’s enormous insurance subsidiaries likely would have entered state rehabilitation proceedings, “leaving policyholders facing considerable uncertainty about the status of their claims.”
He also warned that doubts about insurance products could have produced a run on the broader insurance industry.
Bernanke later gave an even more revealing answer when Senator Jim Bunning suggested that New York’s insurance regulator should have handled AIG. Bernanke responded that the state regulator:
“did not have the capacity to deal with a global insurance company”
whose failure threatened the financial system.
But the Congressional Oversight Panel made the guaranty-association point even more explicitly.
Its investigation concluded that an AIG failure likely would have imposed a significant burden on state guaranty funds and the surviving insurers assessed to finance them. More importantly, because state laws limit annual assessments, the Panel found that AIG’s size likely would have caused guaranty-fund assessments to hit those statutory caps.
The Panel further concluded that it was unclear whether individual state guaranty funds had sufficient capital—or access to capital—to deal with the resulting shortfall.
That is the citation I would put immediately after the Bernanke discussion.
The federal government didn’t wait around in 2008 to see whether fifty state mechanisms could handle a giant insurer collapse.
It rescued AIG.
And Today’s Insurers May Be Harder to Resolve Than the Insurers the Guaranty System Was Built For
The disturbing part is what has happened since AIG.
The Federal Reserve reported in 2025 that life insurers’ exposure to below-investment-grade corporate debt had roughly doubled since the financial crisis. Insurers increasingly obtain this exposure not only through direct loans but through CLOs, BDCs, joint-venture loan funds and other structures involving affiliated asset managers.
The Fed describes some of these arrangements as “complex and arguably opaque” and says they can exploit loopholes in rating methodologies and accounting standards. It even describes an insurer-affiliated structure in which underlying consolidated leverage could reach approximately 12-to-1, while substantial exposures were not transparently consolidated at the insurer level.
That should terrify anyone whose answer to annuity credit risk is:
Don’t worry. There is a state guaranty association.
Private Equity Has Turned Insurance Into a Private-Credit Funding Machine
The NAIC says it had identified 137 private-equity-owned U.S. insurers at year-end 2024, rising to 139 by June 2025. The NAIC specifically identifies related-party investments, structured securities and cross-border reinsurance as areas demanding additional monitoring.
The IMF estimates that U.S. private-equity-influenced life insurers control well over $1 trillion of assets, more than 15% of U.S. life-insurance assets in its analysis. It also finds that PE-influenced insurers tend to hold more illiquid assets.
The Bank for International Settlements reached an even broader conclusion in 2025. It said the life-insurance industry had undergone a “profound structural transformation” involving:
private equity ownership, riskier and more opaque assets, increased derivatives usage and greater reliance on asset-intensive offshore reinsurance.
The BIS concluded that insurers’ systemic importance has increased and specifically identified greater liquidity risk, interconnectedness, valuation opacity and supervisory complexity.
In other words, the insurance industry has moved toward structures that are harder to value, harder to understand, more interconnected and potentially harder to liquidate.
The guaranty system hasn’t remotely evolved at the same speed.
Then Wall Street Moved the Annuity Liabilities Offshore
The offshore numbers may be the biggest addition to the original article.
The IMF found that Bermuda long-term reinsurance assets exceeded $1 trillion, with PE-influenced reinsurers accounting for roughly half of Bermuda’s long-term reinsurance assets in the data it examined. It also found that PE-influenced Bermuda reinsurers allocated substantially more assets to illiquid investments than typical global insurers.
And it has accelerated.
AM Best reported that Bermuda accounted for more than 40% of all reserves ceded by U.S. life-annuity writers in 2024 and more than 60% of reserves associated with transactions effective during 2023 and 2024.
Recent 2026 reporting based on AM Best data indicates that offshore reinsurers accounted for almost 56% of ceded annuity reserves in 2025, with Bermuda still dominant and Cayman gaining ground.
Even Treasury is now paying attention. In May 2026, Treasury Secretary Scott Bessent met with state insurance commissioners specifically to discuss private credit, “the movement of U.S. life and annuity reserves to offshore jurisdictions,” private-letter ratings and offshore reinsurance supervision.
That is an extraordinary sentence.
America is selling retirees a product marketed as guaranteed, while an increasingly large share of the economic machinery supporting those guarantees has migrated through complex offshore reinsurance structures.
PHL Variable Shows What “Guaranteed” Means Before the Guaranty Association Even Arrives
We don’t need to wait for the next AIG to see how messy this can become.
PHL Variable Insurance Company entered rehabilitation in Connecticut in May 2024. By December 2025, its rehabilitator concluded that rehabilitation was not feasible and that liquidation would ultimately be required.
During rehabilitation, some annuity payments and transactions have been restricted by court order.
Its own SEC disclosures now warn customers:
“There is a significant risk that the financial guarantees and obligations under your contract will not be fulfilled.”
The disclosures say liquidation benefits will be subject to state guaranty-association limits—typically $250,000 for annuities—and explicitly warn that general-account guarantees may not be paid in full.
That is what an insurance “guarantee” looks like when the guarantor actually gets into trouble.
The guarantee does not magically transform into Treasury securities.
First comes rehabilitation.
Then restrictions.
Then litigation.
Then valuation.
Then potentially liquidation.
Only then does the statutory guaranty system become fully relevant.
And anything over applicable coverage limits may become a creditor claim against an insolvent estate.
Private Credit Makes the Timing Problem Worse
This is where the private-credit problem connects directly to guaranty associations.
A guaranty association doesn’t create economic value. Ultimately someone has to recover value from the insolvent insurer’s assets, transfer policies to another insurer, or raise money by assessing surviving insurers.
That process is much easier when an insurer owns transparent, liquid securities.
It becomes harder when the balance sheet contains private loans, affiliated investments, CLOs, private asset-backed securities and offshore reinsurance recoverables whose real cash value may be uncertain during a crisis.
The Fed recently noted that leverage among the largest life insurers remained in the upper quartile of its historical range and that insurers have steadily increased holdings of risky and illiquid assets.
And we are now seeing real-world evidence of the gap between private-credit NAVs and cash prices. Recent private-credit tender offers have produced bids at substantial discounts to reported values. As I recently wrote, refusing to sell at 74 cents allows an investor to continue reporting something much closer to $1.00.
That accounting option becomes much less useful when an insurer needs actual cash to meet policyholder obligations.
The Fundamental Flaw: The Healthy Insurers Have to Rescue the Failed Insurers
This is the part most retirement savers are never told.
The guaranty association generally doesn’t sit on a gigantic prefunded reserve comparable to the FDIC Deposit Insurance Fund.
The system largely works by sending an assessment to the surviving insurers.
That was manageable when failures were isolated.
But imagine several heavily interconnected annuity insurers simultaneously suffering losses on:
private credit, CLOs, affiliated loans, real estate, asset-backed finance or offshore reinsurance recoverables.
The companies being assessed to rescue the failed insurers could themselves own similar assets.
That creates a procyclical mechanism:
Insurer A fails → Insurers B, C and D are assessed → B, C and D are already suffering the same market losses → their liquidity and capital decline just when the guaranty system asks them for more cash.
The Congressional Oversight Panel recognized exactly this danger in examining AIG: guaranty-fund assessments could have pulled additional liquidity out of surviving insurers during an already severe liquidity crunch.
Private equity and private credit have made that common-exposure problem substantially more important.
State Guaranty Associations Were Designed for a House Fire. Wall Street Is Building a Wildfire.
That is the updated argument.
State guaranty associations have a legitimate purpose. They can work reasonably well when an individual insurer fails and the rest of the industry remains healthy.
That does not mean they are adequate protection against systemic annuity risk.
They are:
post-funded rather than meaningfully prefunded;
state-by-state rather than national;
subject to policyholder benefit limits;
subject to annual assessment limits;
dependent on surviving insurers remaining solvent and liquid;
potentially slow because they operate through rehabilitation and liquidation proceedings;
and essentially untested against simultaneous failures of today’s giant, private-credit-heavy, offshore-reinsured annuity complexes.
The Chicago Fed admits the system has never really been tested against the failure of a relatively large U.S. insurer.
The Congressional Oversight Panel concluded that AIG likely would have pushed guaranty assessments to their statutory caps.
Bernanke warned that AIG’s insurers could have ended up in rehabilitation with policyholders uncertain about their claims.
And Washington responded by bailing AIG out rather than conducting the experiment.
What ERISA Fiduciaries Should Ask
This is particularly important for pension-risk transfers, fixed annuities in 401(k)s and new lifetime-income products.
A fiduciary shouldn’t be allowed to say simply:
The insurer is highly rated and the state guaranty association provides additional protection.
The questions ought to be:
What is the participant’s actual guaranty-association coverage limit?
How much of the insurer’s portfolio is private or otherwise illiquid?
How much is affiliated?
How much has been reinsured?
Where is the reinsurer domiciled?
What collateral actually secures that reinsurance?
What happens if the reinsurer fails?
What happens if the domestic insurer is downgraded?
Can the participant exit before insolvency?
What are the insurer’s CDS and bond spreads telling us?
And what happens to the guaranty association if several insurers owning the same private-credit risks fail together?
That is why I continue to believe a meaningful downgrade clause is vastly more valuable than telling retirees that somebody may protect them after the insurer is already insolvent.
The sensible time to protect a retiree is before the fire reaches the guaranty association.
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