Insurers as Asset Managers and Systemic Risk

61 Pages Posted: 12 Apr 2018

See all articles by Chotibhak Jotikasthira

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Finance Department

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

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: April 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 VA-writing 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: Insurance companies., Inter-connectedness, Systemic risk; Financial stability

JEL Classification: G11, G12, G14, G18, G22

Suggested Citation

Jotikasthira, Chotibhak and Ellul, Andrew and Kartasheva, Anastasia V. and Lundblad, Christian T. and Wagner, Wolf, Insurers as Asset Managers and Systemic Risk (April 2018). Available at SSRN: https://ssrn.com/abstract=3159152

Chotibhak Jotikasthira (Contact Author)

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

United States

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

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

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

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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