European insurers and pension funds would take a heavier hit than banks from a severe private credit market shock, the European Central Bank said, after running an illustrative stress exercise on the sector.
A broader second-round repricing of market assets followed, according to an extract from the ECB’s financial stability review.
The illustrative exercise included three stages: direct private credit losses, further hits from loans to software firms in correlated leveraged debt markets and broader second-round market revaluations.
Insurers faced the largest absolute impact. Their exposures to private credit were larger and less senior, and their equity holdings suffered more from the broader market repricing, the ECB said. Pension funds absorbed the largest aggregate losses from all three stages when measured against total assets.
Banks looked more insulated. Their losses stayed contained and did not exceed 1.3% of total equity, helped by the senior ranking of their loans to private credit funds and the smaller size of those positions.
Banks have high exposure to leveraged loans, the ECB said, though losses tied to software-sector exposures and wider market repricing stayed small in aggregate.
According to Fitch’s recent survey of European insurers, the primary motivation for investing in private assets is higher returns through illiquidity premiums, which was cited by all 15 respondents.
Appetite for private credit was generally higher among life insurers and non-life and reinsurance firms with meaningful long-dated liabilities.
Portfolio diversification was the second most common reason, cited by 73% of respondents. Respondents also cited hedging against market volatility and operating-capital generation.
Private credit has come under pressure in recent months. Investors have questioned AI-related spending, the technology’s disruptive effect on software companies, and the quality of lending standards across parts of the market.
The ECB said private credit, viewed on its own, is unlikely to threaten euro area financial stability. Its connections with traditional finance still need steady monitoring.
The report also set out the scale of euro area exposures. Private credit funds run from the euro area held about €100 bn, or $116 bn, in assets under management in 2025.
Euro area insurers had about €211 bn of exposure to private credit, equal to 2.3% of total assets. Pension funds held €52 bn, or 1.4% of total assets. Banks held €62.5 bn, or 0.2% of total assets.
The ECB also warned about concentration. In both banking and insurance, private credit exposures sit heavily with a small number of large institutions.
Private credit accounted for about 5.1%, or roughly €515 bn, of total investments. Life insurers hold the largest share at 57.5%, followed by composite insurers at 23.2%, non-life insurers at 14.6%, and reinsurers at 4.7%.
The distribution aligns with liability profiles, as life insurers manage long-duration obligations tied to savings and retirement products.
Growth in private credit exposure links to yield demand and asset-liability matching. According to Beinsure analysts, insurers continue seeking higher-return assets that align with long-term liabilities while maintaining capital efficiency under regulatory frameworks.
Risk remains uneven across segments. S&P highlighted higher-risk areas such as distressed debt, junior securitisation tranches, and leveraged buyout debt funds.
EU insurers maintain limited exposure to these segments, reducing the overall impact on portfolio risk.
Large global insurers began building private credit capabilities more than a decade ago. Smaller regional players entered later and often rely on external asset managers to access the market. This difference reflects variations in scale, expertise, and internal investment infrastructure.
