Insurers as Asset Managers and Systemic Risk

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

No 12849, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Financial intermediaries often provide guarantees that resemble out-of-the-money put options, exposing them to tail risk. Using the U.S. life insurance industry as a laboratory, we present a model in which variable annuity (VA) guarantees and associated hedging operate within the regulatory capital framework to create incentives for insurers to overweight illiquid bonds ("reach-for-yield"). We then calibrate the model to insurer-level data, and show that the VA-writing insurers' collective allocation to illiquid bonds exacerbates system-wide fire sales in the event of negative asset shocks, plausibly erasing up to 20-70% of insurers' equity capital.

Keywords: Inter-connectedness; Insurance companies; Systemic risk; Financial stability (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G18 G22 (search for similar items in EconPapers)
Date: 2018-04
New Economics Papers: this item is included in nep-ias and nep-rmg
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Citations: View citations in EconPapers (16)

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Related works:
Journal Article: Insurers as Asset Managers and Systemic Risk (2022)
Working Paper: Insurers as asset managers and systemic risk (2018)
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