Portfolio Similarity and Asset Liquidation in the Insurance Industry

Abstract

We examine whether the concern of academics and regulators about the potential for insurers to sell similar assets due to the overlap in their holdings is justified. We measure this overlap using cosine similarity and find that insurers with more similar portfolios have larger subsequent common sales. We show that faced with a shock to their assets or liabilities, affected insurers with greater portfolio similarity have larger common sales that impact prices. Our measure can be used by regulators to predict the common selling of any institution that reports security or asset class holdings regardless of their public company status making it a useful ex-ante predictor of divestment behavior in times of market stress.

Keywords: Interconnectedness, asset liquidation, similarity, financial stability, insurance companies, fire sales

JEL Classification: G11, G18, G2