By: StepStone Insurance Solutions
Key takeaways
- Insurers are increasing allocations to private markets for yield, diversification, and asset-liability matching, but face friction from regulatory capital charges (RBC), illiquidity, and structural complexity.
- ICOLI (Insurance Company Owned Life Insurance) paired with an IDF (Insurance Dedicated Fund) provides a tax and capital wrapper that enables tax-deferred compounding, income tax-free death benefits, and regulated private market access.
- Capital efficiency is the core value proposition: ICOLI assets carry RBC charges of just 0–5% versus 20%+ for direct private fund holdings.
- ICOLI suitability is conditional. It requires sufficient scale (often $25M+ premium), consenting insureds, a benefit liability to offset, a long tax horizon (20+ years), and internal governance capacity.
- Ongoing risks (illiquidity, structural and regulatory compliance, tax disqualification, and mortality or key-person risk) must be actively managed, and StepStone positions itself as the specialized IDF partner to navigate this complexity.
Executive summary
Insurers face a familiar tension: private markets offer the long-duration, yield- enhancing characteristics that match insurance liabilities, but regulatory capital charges, liquidity constraints, and structural complexity often stand in the way. ICOLI and IDFs offer a proven solution.
ICOLI (Insurance Company Owned Life Insurance): A corporate-owned life insurance policy that an insurer purchases on the lives of consenting executives—the investment returns grow tax-deferred, and the insurer receives tax-free death benefits.
IDF (Insurance Dedicated Fund): The investment vehicle that sits inside the ICOLI, through which the insurer accesses private markets.
Insurers face a familiar tension: private markets offer the long-duration, yield-enhancing characteristics that match insurance liabilities, but regulatory capital charges, liquidity constraints, and structural complexity often stand in the way. ICOLI and IDFs offer a proven solution.
The shift toward private markets
Driven by a variety of factors, insurers have increased their allocations to private markets.
- Facing low interest rates and bond yield compression in recent years, insurers have added private market exposures(especially private debt) to complement public fixed-income investments that they’ve long relied upon.
- Inflationary, demographic, and supply/demand pressures are further compelling insurers to allocate more toward “total return” strategies including private equity, real estate, and infrastructure equity, which offer capital appreciation and income.
- Insurers are also required to match their investments to their long-term liabilities, a practice known as asset-liability matching (ALM), which makes private markets’ long-duration characteristics a natural fit.
- Market volatility, traditional public market asset correlation, and geopolitical risks present additional reasons why insurance investors are looking toward diversifiers that can provide downside protection without compromising upside potential—something private markets have been able to achieve over the long run.
Recent surveys suggest this strategic shift isn’t fleeting: most insurers plan to increase their allocations to private markets over the next two years.1
While private markets can solve the myriad needs of insurers (e.g., income, capital appreciation, and diversification), they introduce challenges such as liquidity management and complex investment structures. Moreover, insurers must hold a minimum amount of capital as a buffer against investment losses—a regulatory measure known as a risk-based capital (RBC) charge—and private market assets often attract higher charges than traditional fixed income, increasing the effective cost of those allocations.2 These factors require insurers to balance return objectives with operational considerations.
As such, tax efficiency and capital optimization have become critical in evaluating private market allocations.
ICOLI structure
To optimize long-dated liabilities and investment allocations, some insurers have turned to ICOLI and IDFs and specifically to the combination of the two.
• ICOLI is a life insurance policy and acts as the legal and tax wrapper. The insurance company is the policy owner, premium payor, and beneficiary, while senior employees serve as the insureds. Investment returns accumulate on an income tax-free basis for as long as the policy remains in force, and assets are not surrendered.
• IDFs sit inside the ICOLI and do the investment work: they are the vehicle through which the insurer gains access
to private markets in a structure that satisfies regulatory requirements.
Together, they allow an insurer to pursue private market returns while preserving the tax and capital benefits of an insurance wrapper.
FIGURE 1: ICOLI LIFE CYCLE
Policyholder pays premium (typically with a single upfront premium)
Premium is invested into an IDF
Premiums and expenses charged to the policyholder by the insurance carrier
Carrier pays claims based on underlying mortality of the covered employees
At policy end, the value of the policy including investment gains is distributed back to the policyholder
Source: StepStone Group. For illustrative purposes only.
1. KKR 2024 Insurance Survey, SLC Management Global Insurance Group 2025 Insurance Asset Management Survey and BlackRock 2025 Global Insurance Report: Opportunity Amid Uncertainty.
2. The NAIC applies high RBC charges for private fund investments for US-based insurers.
