The fluctuations of insurers’ risk appetite

Elisa Luciano and Jean Rochet

Journal of Economic Dynamics and Control, 2022, vol. 144, issue C

Abstract: The risk appetite of insurance companies fluctuates over time in a quasi cyclical fashion. When their capitalization is high (low), companies choose portfolios with a high (small) share of risky assets. We show that this phenomenon has the same source as the underwriting cycle, namely recapitalization costs. We build a dynamic stochastic general equilibrium model of the insurance sector where financial frictions prevent companies from maintaining a target leverage. Portfolio decisions of insurers fluctuate with their aggregate capitalization. The model rationalizes two apparently disjoint pieces of evidence: long-standing empirical evidence on underwriting cycles and more recent evidence on the fluctuations of insurance companies’ risk appetite.

JEL-codes: G11 G12 G23 (search for similar items in EconPapers)
Date: 2022
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Working Paper: The Fluctuations of Insurers’ Risk Appetite (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:144:y:2022:i:c:s0165188922002469

DOI: 10.1016/j.jedc.2022.104543

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