Risk Appetite Fluctuations in the Insurance Industry

Elisa Luciano and Jean Rochet

Carlo Alberto Notebooks from Collegio Carlo Alberto

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 may have the same source as the un derwriting cycle, namely recapitalization costs. We build a simple dynamic 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

Keywords: endogenous risk appetite; macro finance; insurance cycles; insurance asset allocation (search for similar items in EconPapers)
Pages: 46 pages
Date: 2021
New Economics Papers: this item is included in nep-cwa, nep-dge, nep-ias and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:666

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