Insurers as asset managers and systemic risk

Arbeitspapier

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.

Object Details

• ISBN: 978-92-9472-042-9
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ESRB Working Paper Series ; No. 75

Classification and Topics

• Classification: Wirtschaft ; Portfolio Choice; Investment Decisions ; Asset Pricing; Trading Volume; Bond Interest Rates ; Information and Market Efficiency; Event Studies; Insider Trading ; General Financial Markets: Government Policy and Regulation ; Insurance; Insurance Companies; Actuarial Studies
• Subject: Systemic risk ; Financial stability ; Inter-connectedness ; Insurance companies

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Ellul, Andrew ; Jotikasthira, Chotibhak ; Kartasheva, Anastasia ; Lundblad, Christian T. ; Wagner, Wolf
• Event: Veröffentlichung
• (who): European Systemic Risk Board (ESRB), European System of Financial Supervision
• (where): Frankfurt a. M.
• (when): 2018

Further information

• DOI: doi:10.2849/709634
• Handle: http://hdl.handle.net/10419/193582
• Last update: 10.03.2025, 11:43 AM CET