Insurers As Asset Managers and Systemic Risk
Review of Financial Studies (forthcoming)
121 Pages Posted: 8 Jan 2018 Last revised: 8 Aug 2022
There are 3 versions of this paper
Insurers As Asset Managers and Systemic Risk
Insurers as Asset Managers and Systemic Risk
Insurers as Asset Managers and Systemic Risk
Date Written: August 3, 2022
Abstract
Financial intermediaries often provide guarantees resembling out-of-the-money put options, exposing them to undiversifiable tail risk. We present a model in the context of the U.S. life insurance industry in which the regulatory framework incentivizes value-maximizing insurers to hedge variable annuity (VA) guarantees, though imperfectly, and shifts risks into high-risk and illiquid bonds. We calibrate the model to insurer-level data and identify the VA-induced changes in insurers’ risk exposures. In the event of major asset and guarantee shocks and absent regulatory intervention, these shared exposures exacerbate system-wide fire sales to maintain capital ratios, plausibly erasing over half of insurers’ equity capital.
Keywords: Financial stability, Illiquid assets, Fire sales, Insurance companies.
JEL Classification: G11, G12, G14, G18, G22
Suggested Citation: Suggested Citation