Regulatory Limits to Risk Management

Ishita Sen

The Review of Financial Studies, 2023, vol. 36, issue 6, 2175-2223

Abstract: Variable annuities, the largest liability of U.S. life insurers, are investment products containing long-dated minimum return guarantees. I show that guarantees with similar economic risks are treated differently by regulation and these differences impact insurers’ hedging behavior. When the regulatory regime recognizes certain risks, insurers start to hedge these risks in a substantial way. For some guarantees, this involves hedging both interest rate and equity market risks. However, for others, it involves hedging only equity market risk. As the regulatory regime still does not recognize the interest rate risk of all guarantees, insurers remain exposed to substantial interest rate risk.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 G22 G23 G28 G32 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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