It took state insurance commissioners four years to clamp down on one kind of structured debt, while insurers piled into other, equally risky, flavors. Regulators this month approved rules to protect policyholders against big losses on a $314 billion slice of structured debt held in insurers’ portfolios. By the time the four‑year rule‑making process finished, the industry had found ways around those rules.

The regulations target collateralized loan obligations (CLOs), funds backed by pools of junk‑rated corporate debt. They were all the rage until a few years ago, according to the National Association of Insurance Commissioners. Insurer holdings doubled from 2018-2022, prompting regulators to urge more reserves to guard against loss, while CLO interest rates fell.

Insurers moved to other debt instruments that carried the same potential and risks as CLOs but were not subject to the new rules. They still added CLOs, but the yearly growth rate slid into the single digits; the overall increase for total structured securities, including those backed by student loans, car payments, music royalties and other assets, stayed steady at around 10%.

"People feared a major crackdown in CLOs and so they created other forms of oftentimes similar structured securities to invest in," said Aaron Sarfatti, former chief risk officer at Equitable and a member of the Federal Reserve’s Insurance Policy Advisory Committee. The episode illustrates why Wall Street’s private‑equity titans have flocked to the life‑insurance business: unlike bank regulators, state commissioners overseeing insurers didn’t overhaul their capital rules in the wake of the 2008-09 financial crisis.