Discussion Paper Details

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Title: Insurers as Asset Managers and Systemic Risk

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

Publication Date: April 2018

Keyword(s): Financial Stability, Insurance companies, Inter-connectedness and systemic risk

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Chotibhak, J, Ellul, A, Kartasheva, A, Lundblad, C and Wagner, W. 2018. 'Insurers as Asset Managers and Systemic Risk'. London, Centre for Economic Policy Research.