Insurers as Asset Managers and Systemic Risk

Wolf Wagner (), Anastasia Kartasheva, Jotikasthira Chotibhak, Andrew Ellul and Christian Lundblad

No 12849, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: Inter-connectedness; Insurance companies; Systemic risk; Financial stability (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G18 G22 (search for similar items in EconPapers)
Date: 2018-04
New Economics Papers: this item is included in nep-ias and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Journal Article: Insurers as Asset Managers and Systemic Risk (2022)
Working Paper: Insurers as asset managers and systemic risk (2018)
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