Insurers as Asset Managers and Systemic Risk

Andrew Ellul, Chotibhak Jotikasthira, Anastasia Kartasheva, Christian T Lundblad and Wolf Wagner

The Review of Financial Studies, 2022, vol. 35, issue 12, 5483-5534

Abstract: Financial intermediaries often provide guarantees resembling out-of-the-money put options, exposing them to undiversifiable tail risk. We present a model in the context of the U.S. life insurance industry in which the regulatory framework incentivizes value-maximizing insurers to hedge variable annuity (VA) guarantees, though imperfectly, and shifts risks into high-risk and illiquid bonds. We calibrate the model to insurer-level data and identify the VA-induced changes in insurers’ risk exposures. In the event of major asset and guarantee shocks and absent regulatory intervention, these shared exposures exacerbate system-wide fire sales to maintain capital ratios, plausibly erasing over half of insurers’ equity capital.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

JEL-codes: G11 G12 G14 G18 G22 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (10)

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Working Paper: Insurers as Asset Managers and Systemic Risk (2018)
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