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FRM Part II · FRM Exam Part II · The Rise and Risks of Private Credit

An insurer increases its allocation to private credit funds to pick up an illiquidity premium. Which risk consideration is most relevant to its investment risk management?

The key concern is that infrequent, model-based valuations can understate true risk and the assets are hard to sell, so an insurer may face liquidity mismatches if it needs cash in stress.

  1. APrivate credit is marked daily, so valuation risk is negligible
  2. BInfrequent, model-based valuations and limited exit routes can mask risk and create liquidity mismatches if liabilities need funding in stressCorrect
  3. CInsurer regulation prohibits any link between private credit and bank lending
  4. DIlliquid assets always reduce portfolio volatility, so no additional risk analysis is needed

Explanation

Private credit is typically valued using models or manager marks at intervals, which can smooth reported volatility. Illiquidity also limits sales when liabilities require cash. Option D confuses smoothed reported risk with actual risk.

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