The Life Insurance Industry and Systemic Risk: A Bond Market Perspective

37 Pages Posted: 5 May 2016

See all articles by Anna L. Paulson

Anna L. Paulson

Federal Reserve Bank of Chicago

Richard J. Rosen

Federal Reserve Bank of Chicago - Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: 2016-03-04

Abstract

The 2008 financial crisis brought a focus on the potential for a large insurance firm to contribute to systemic risk. Among the concerns raised was that a negative shock to insurers could lead to a ‘fire sale’ of corporate bonds, a market where insurers are among the largest participants. This paper discusses the existing evidence on life insurance firms and systemic risk, with a focus on the investment grade corporate bond market. We provide some tentative evidence that life insurers tend to absorb liquidity risk by purchasing bonds when the bonds are less liquid than average. However, we do not find evidence that insurers increased bond purchases specifically during the financial crisis leaving open the question of whether insurers would play a stabilizing role in a future crisis.

Keywords: Insurance, Bond, Over-the-Counter (OTC), Trading

JEL Classification: G12, G14, G22, G24

Suggested Citation

Paulson, Anna L. and Rosen, Richard J., The Life Insurance Industry and Systemic Risk: A Bond Market Perspective (2016-03-04). FRB of Chicago Working Paper No. WP-2016-4. Available at SSRN: https://ssrn.com/abstract=2775585

Anna L. Paulson (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312 322 2169 (Phone)

Richard J. Rosen

Federal Reserve Bank of Chicago - Economic Research ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-6368 (Phone)
312-294-6262 (Fax)

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