Insurers as Asset Managers and Systemic Risk

59 Pages Posted: 5 Nov 2020

See all articles by Andrew Ellul

Andrew Ellul

Indiana University - Kelley School of Business - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); University of Naples Federico II - CSEF - Center for Studies in Economics and Finance

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Finance Department

Anastasia V. Kartasheva

affiliation not provided to SSRN

Christian T. Lundblad

affiliation not provided to SSRN

Wolf Wagner

Erasmus University Rotterdam (EUR); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

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

Ellul, Andrew and Jotikasthira, Chotibhak and Kartasheva, Anastasia V. and Lundblad, Christian T. and Wagner, Wolf, Insurers as Asset Managers and Systemic Risk (May, 2018). ESRB: Working Paper Series No. 2018/75, Available at SSRN: https://ssrn.com/abstract=3723422

Andrew Ellul (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
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United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

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Belgium

University of Naples Federico II - CSEF - Center for Studies in Economics and Finance ( email )

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Complesso Monte S. Angelo
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Italy

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Finance Department ( email )

United States

Anastasia V. Kartasheva

affiliation not provided to SSRN

Christian T. Lundblad

affiliation not provided to SSRN

No Address Available

Wolf Wagner

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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