2018
Insurers as asset managers and systemic risk
Publication
Publication
VoxEU.org
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.
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hdl.handle.net/1765/125168 | |
VoxEU.org | |
Organisation | Department of Finance |
Ellul, Andrew, Jotikasthira, Chotibhak, Wagner, W., Kartasheva, Anastasia, & Lundblad, Christian. (2018). Insurers as asset managers and systemic risk. VoxEU.org. Retrieved from http://hdl.handle.net/1765/125168 |