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Andrew Ellul (Indiana University Kelley School of Business)

1 October 2019 @ 14:30 - 15:45

 

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Details

Date:
1 October 2019
Time:
14:30 - 15:45
Event Category:
Academic Events

“Insurers as Asset managers and Systemic Risk”

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 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.