Insurers as Asset Managers and Systemic Risk
UNIVERSITY OF TECHNOLOGY SYDNEY
Finance Discipline Group
Research Seminars in Finance
Topic: Insurers as Asset Managers and Systemic Risk
Speaker: Andrew Ellul, Indiana University
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.
Date: Wednesday, 17th October 2018
Time: 12.00 – 1.00 p.m.
Venue: University of Technology, Sydney
Building 8, Room 4.009, Dr Chau Chak Wing Building
Dr Chau Chak Wing Building
Dr Chau Chak Wing Building
14 - 28 Ultimo Road, Ultimo
Enquiries: Mala Kapahi (Ph: +61 2 9514 7777)