Unlike public bond ratings, private credit assets on insurer balance sheets are assessed using non-public "private letter ratings." This opacity, combined with skewed rating agency incentives, leads to the overvaluation of these assets, obscuring true portfolio risk from regulators.

The complex, state-by-state guarantee fund system designed to handle insurer insolvencies has never been used for a major national insurer with hundreds of billions in assets. Its ability to manage a large failure in a systemic crisis is entirely theoretical and unproven.

The government inevitably acts as an "insurer of last resort" during systemic crises to prevent economic collapse. The danger, highlighted by the OpenAI controversy, is when companies expect it to be an "insurer of first resort," which encourages reckless risk-taking by socializing losses while privatizing gains.

Acknowledging a de facto government backstop before a crisis encourages risky behavior. Lenders, knowing their downside is protected on AI infrastructure loans, are incentivized to lend as much as possible without proper diligence. This creates a larger systemic risk and privatizes profits while socializing eventual losses.

A proposed solution for the insurance sector's moral hazard is to adopt the "Source of Strength Doctrine" from banking. This would legally require affiliates within a holding company (like a PE parent) to financially support a failing insurer, directly aligning the downside risk with the controlling entity.

A rule requiring insurers to spend 85% of premiums on care caps their profit margin at 15%. This creates a perverse incentive: the only way for an insurer to increase its absolute profit is to increase total healthcare spending, discouraging preventative care and cost-saving measures.

The consistent history of government bailouts in the airline industry incentivizes risky financial behavior. CEOs know they can operate without a financial safety net because taxpayer money will likely rescue them in a crisis.

Contrary to popular belief, insurance companies profit from accidents as long as they are actuarially predictable. The absence of risk would eliminate their business model. Kalanick explains that they, alongside trial lawyers, have incentives to maintain a system with manageable, insurable risk rather than eliminate it entirely.

Unlike the FDIC, state insurance guarantee funds are post-funded. Surviving insurers pay for a failed competitor's losses but then receive state tax credits for these payments. This structure creates an automatic, taxpayer-funded bailout without any legislative action.