Insurers As Asset Managers and Systemic Risk

120 Pages Posted: 8 Jan 2018 Last revised: 4 May 2022

See all articles by Andrew Ellul

Andrew Ellul

Indiana University - Kelley School of Business - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Finance Department

Anastasia V. Kartasheva

University of St. Gallen - I.VW-HSG; Joshua J. Harris Alternative Investment Program

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School; Frank Hawkins Kenan Institute of Private Enterprise

Wolf Wagner

Erasmus University Rotterdam (EUR)

Multiple version iconThere are 3 versions of this paper

Date Written: May 1, 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 shift 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

Ellul, Andrew and Jotikasthira, Chotibhak and Kartasheva, Anastasia V. and Lundblad, Christian T. and Wagner, Wolf, Insurers As Asset Managers and Systemic Risk (May 1, 2022). Kelley School of Business Research Paper No. 18-4, SMU Cox School of Business Research Paper No. 18-18, Available at SSRN: https://ssrn.com/abstract=3096147 or http://dx.doi.org/10.2139/ssrn.3096147

Andrew Ellul

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Chotibhak Jotikasthira (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States

Anastasia V. Kartasheva

University of St. Gallen - I.VW-HSG ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

Joshua J. Harris Alternative Investment Program ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

Frank Hawkins Kenan Institute of Private Enterprise ( email )

Campus Box 3440, The Kenan Center
Chapel Hill, NC 27599-344
United States

Wolf Wagner

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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