Insurers as asset managers and systemic risk

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

No 75, ESRB Working Paper Series from European Systemic Risk Board

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. JEL Classification: G11, G12, G14, G18, G22

Keywords: financial stability; insurance companies; inter-connectedness; systemic risk (search for similar items in EconPapers)
Date: 2018-05
New Economics Papers: this item is included in nep-ias and nep-rmg
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Citations: View citations in EconPapers (17)

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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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Persistent link: https://EconPapers.repec.org/RePEc:srk:srkwps:201875

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