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

Posted: 18 Nov 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: October 2016

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 manuscript 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.

Suggested Citation

Paulson, Anna L. and Rosen, Richard J., The Life Insurance Industry and Systemic Risk: A Bond Market Perspective (October 2016). Annual Review of Financial Economics, Vol. 8, pp. 155-174, 2016. Available at SSRN: https://ssrn.com/abstract=2870865 or http://dx.doi.org/10.1146/annurev-financial-121415-032840

Anna L. Paulson (Contact Author)

Federal Reserve Bank of Chicago ( email )

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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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