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The Life Insurance Industry and Systemic Risk: A Bond Market Perspective

Author

Listed:
  • Anna Paulson

    (Federal Reserve Bank of Chicago, Chicago, Illinois 60604)

  • Richard Rosen

    (Federal Reserve Bank of Chicago, Chicago, Illinois 60604)

Abstract

The 2008 financial crisis brought a focus on the potential for a large insurance firm to contribute to systemic risk. Among the concerns raised was that a negative shock to insurers could lead to a fire sale of corporate bonds, a market where insurers are among the largest participants. This manuscript discusses the existing evidence on life insurance firms and systemic risk, with a focus on the investment-grade corporate bond market. We provide some tentative evidence that life insurers tend to absorb liquidity risk by purchasing bonds when the bonds are less liquid than average. However, we do not find evidence that insurers increased bond purchases specifically during the financial crisis, leaving open the question of whether insurers would play a stabilizing role in a future crisis.

Suggested Citation

  • Anna Paulson & Richard Rosen, 2016. "The Life Insurance Industry and Systemic Risk: A Bond Market Perspective," Annual Review of Financial Economics, Annual Reviews, vol. 8(1), pages 155-174, October.
    • Handle: RePEc:anr:refeco:v:8:y:2016:p:155-174
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    File URL: http://www.annualreviews.org/doi/10.1146/annurev-financial-121415-032840
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    Cited by:

    1. Chia‐Chun Chiang & Greg Niehaus, 2020. "Correlated Trading by Life Insurers and Its Impact on Bond Prices," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(3), pages 597-625, September.
    2. Focarelli, Dario, 2017. "Why Insurance Regulation is Crucial for Long-term Investment and Economic Growth," LEAP Working Papers 2017/1, Luiss Institute for European Analysis and Policy.

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    More about this item

    Keywords

    interest rate risk; corporate bonds; variable annuities;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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