An elusive panacea? The impact of the regulatory valuation regime on insurers' investment behaviour

Caterina Lepore, Misa Tanaka, David Humphry (david.humphry@bankofengland.co.uk) and Kallol Sen (kallol.sen@bankofengland.co.uk)
Additional contact information
David Humphry: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Kallol Sen: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 710, Bank of England working papers from Bank of England

Abstract: This paper examines how the interactions between the valuation regime and solvency requirements influence investment behaviour of long-term investors with stable liabilities, such as life insurers. Under limited liability, solvency requirements based on historical cost valuation encourage risk-shifting to the detriment of policyholders, while those based on fair value regime can induce procyclical asset sales. A hybrid valuation regime, intended to address these unfavourable outcomes, does not strictly dominate the other two regimes. But both fair value and hybrid regimes outperform the historical cost regime if the regulators can set the penalty imposed on insurers based on supervisory information about their asset quality, even if this information is imperfect.

Keywords: Valuation; historical cost accounting; mark-to-market; risk-shifting; fire sales; prudential regulation; insurance (search for similar items in EconPapers)
JEL-codes: G22 G28 M41 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2018-02-09
New Economics Papers: this item is included in nep-cba, nep-ias, nep-ore and nep-rmg
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Citations: View citations in EconPapers (1)

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Journal Article: An elusive panacea? The impact of the regulatory valuation regime on insurers' investment behaviour (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0710

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