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Risk Appetite Fluctuations in the Insurance Industry

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  • Elisa Luciano
  • Jean Charles Rochet

Abstract

The risk appetite of insurance companies fluctuates over time in a quasi cyclical fashion. When their capitalization is high (low), companies choose portfolios with a high (small) share of risky assets. We show that this phenomenon may have the same source as the un derwriting cycle, namely recapitalization costs. We build a simple dynamic model of the insurance sector where financial frictions prevent companies from maintaining a target leverage. Portfolio decisions of insurers fluctuate with their aggregate capitalization. The model rationalizes two apparently disjoint pieces of evidence: long-standing empirical evidence on underwriting cycles and more recent evidence on the fluctuations of insurance companies’ risk appetite

Suggested Citation

  • Elisa Luciano & Jean Charles Rochet, 2021. "Risk Appetite Fluctuations in the Insurance Industry," Carlo Alberto Notebooks 666 JEL Classification: G, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:666
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    Keywords

    endogenous risk appetite; macro finance; insurance cycles; insurance asset allocation;
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