Download This PaperInsurers as Asset Managers and Systemic Risk
59 Pages Posted: 5 Nov 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: May, 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: financial stability, insurance companies, inter-connectedness, systemic risk
JEL Classification: G11, G12, G14, G18, G22
Suggested Citation: Suggested Citation
Andrew Ellul (Contact Author)
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States
European Corporate Governance Institute (ECGI) ( email )
c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium
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