Key facts
- U.S. insurance regulators revised capital rules for insurers investing in collateralized loan obligations (CLOs).
- Critics argue the changes underestimate correlations within CLO loan pools.
- Critics also argue the changes underestimate correlations across CLO portfolios.
- The revisions may fail to account for tail risks.
- Tail risks are potential extreme, low-probability, high-impact events.
U.S. insurance regulators have introduced revisions to capital rules specifically concerning insurers' investments in collateralized loan obligations (CLOs). These changes aim to adjust the capital requirements that insurers must hold when investing in these structured finance products. However, the revisions have drawn criticism from industry observers and analysts. A primary concern raised by critics is that the updated rules may not sufficiently account for the correlations that exist within the underlying loan pools of CLOs. Furthermore, critics argue that the correlations across different CLO portfolios held by an insurer are also underestimated. This potential underestimation of correlation risks could lead to a failure to adequately capture and account for tail risks. Tail risks refer to the potential for extreme, low-probability but high-impact events that could significantly affect the value of CLO investments and the financial stability of insurers holding them.