Regulatory Limits to Risk Management

The Review of Financial Studies

95 Pages Posted: 26 Mar 2019 Last revised: 11 Feb 2022

See all articles by Ishita Sen

Ishita Sen

Harvard University - Harvard Business School; affiliation not provided to SSRN

Date Written: September 1, 2019

Abstract

Variable annuities, the largest liability of U.S. life insurers, are investment products containing long-dated minimum return guarantees. I show that guarantees with similar economic risks are treated differently by regulation and these differences impact insurers’ hedging behavior. When the regulatory regime recognizes certain risks, insurers start to hedge these risks in a substantial way. For some guarantees, this involves hedging both interest rate and equity-market risks. However, for others, it involves hedging only equity-market risk. As the regulatory regime still does not recognize the interest rate risk of all guarantees, insurers remain exposed to substantial interest rate risk.

Keywords: Risk Management, Interest Rate Risk, Variable Annuities, Capital Regulation, Reinsurance, Derivatives

JEL Classification: G11, G12, G22, G28, G32

Suggested Citation

Sen, Ishita, Regulatory Limits to Risk Management (September 1, 2019). The Review of Financial Studies, Available at SSRN: https://ssrn.com/abstract=3345880 or http://dx.doi.org/10.2139/ssrn.3345880

Ishita Sen (Contact Author)

Harvard University - Harvard Business School ( email )

Soldiers Field
Baker Library
Boston, MA 02163
United States

affiliation not provided to SSRN

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