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The Fluctuations of Insurers’ Risk Appetite

Elisa Luciano and Jean Rochet

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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 has the same source as the underwriting cycle, namely recapitalization costs. We build a dynamic stochastic general equilibrium 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.

Date: 2022-11
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Published in Journal of Economic Dynamics and Control, 2022, 144, pp.104543. ⟨10.1016/j.jedc.2022.104543⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04052327

DOI: 10.1016/j.jedc.2022.104543

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