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When gambling for resurrection is too risky

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  • Kirti, Divya

Abstract

The financial crisis pushed some large life insurers to the brink of insolvency. Instead of gambling for resurrection, insurers in severe distress pulled back from risk taking. They systematically reduced risk appetite relative to insurers with low default probabilities across many jointly available individual incremental investment opportunities. Importantly, as insurers in distress reduced risk even within investment opportunities with identical treatment, regulatory constraints alone cannot explain these findings. This evidence suggests that franchise value can make gambling for resurrection too risky, even following severe shocks to large financial institutions' solvency. Actions that clarify future prospects, like stress tests, may be needed to support risk appetite during crises.

Suggested Citation

  • Kirti, Divya, 2024. "When gambling for resurrection is too risky," Journal of Banking & Finance, Elsevier, vol. 162(C).
    • Handle: RePEc:eee:jbfina:v:162:y:2024:i:c:s0378426624000451
    DOI: 10.1016/j.jbankfin.2024.107125
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    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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