Download This PaperInsurers As Asset Managers and Systemic Risk
71 Pages Posted: 8 Jan 2018 Last revised: 23 Jun 2020
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Insurers As Asset Managers and Systemic Risk
Insurers as Asset Managers and Systemic Risk
Insurers as Asset Managers and Systemic Risk
Date Written: June 21, 2020
Abstract
Financial intermediaries often provide guarantees that resemble out-of-the-money put options, exposing them to tail risk. We present a model in the context of the U.S. life insurance industry in which variable annuity (VA) guarantees and associated hedging operate within the regulatory capital framework to create incentives for insurers to overweight high-risk and illiquid bonds. We calibrate the model to insurer-level data, and identify the VA-induced allocation to these bonds. In the event of asset value or guarantee shocks and absent regulatory intervention, such allocation exacerbates system-wide fire sales (to maintain capital ratios), plausibly erasing 22-127% of insurers' equity capital.
Keywords: Systemic risk, Financial stability, Inter-connectedness, Financial intermediaries, Insurance companies
JEL Classification: G11, G12, G14, G18, G22
Suggested Citation: Suggested Citation
Andrew Ellul
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States
Joshua J. Harris Alternative Investment Program ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
Frank Hawkins Kenan Institute of Private Enterprise ( email )
Campus Box 3440, The Kenan Center
Chapel Hill, NC 27599-344
United States
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