Insurers As Asset Managers and Systemic Risk

58 Pages Posted: 8 Jan 2018 Last revised: 30 Mar 2018

Andrew Ellul

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

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Finance Department

Anastasia V. Kartasheva

International Association of Insurance Supervisors, c/o Bank for International Settlements

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 3, 2018

Abstract

Financial intermediaries often provide guarantees that resemble out-of-the-money put options,
exposing them to tail risk. Using the U.S. life insurance industry as a laboratory, we present
a model in which variable annuity (VA) guarantees and associated hedging operate within
the regulatory capital framework to create incentives for insurers to overweight illiquid bonds
(“reach-for-yield”). We then calibrate the model to insurer-level data, and show that the VAwriting
insurers’ collective allocation to illiquid bonds exacerbates system-wide fire sales in the
event of negative asset shocks, plausibly erasing up to 20-70% of insurers’ equity capital.

Keywords: Systemic risk, Financial stability, Inter-connectedness, Financial intermediaries, 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 (January 3, 2018). 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 )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

University of Naples Federico II - CSEF - Center for Studies in Economics and Finance ( 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

International Association of Insurance Supervisors, c/o Bank for International Settlements ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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)

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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