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Asset-liability management in life insurance: Evidence from France

Author

Listed:
  • victor Lyonnet

    () (CREST; HEC Paris)

Abstract

This paper studies the asset-liability management of life insurers. We start with a life insurance investor’s problem of the optimal date to redeem; as a function of taxes and rates of return. The model predicts that life insurers whose investors’ contract age is relatively young should be more exposed to redemption risk. We then build a novel confidential dataset and test whether life insurers’ portfolio choice is responsive to redemption risk. Using different measures of redemption risk and controlling for year fixed effects; we find that a one standard deviation increase in redemption risk is associated with an average decrease in the share of directly-held stocks by 2.3% or slightly more than one-half of its standard deviation (4.5%). This result remains valid when accounting for indirect stock investment through funds. Finally; we check our model’s prediction that redemption risk depends on insurers’ investor contract age and use this to propose and exogenous measure of redemption risk and make a causal attempt.

Suggested Citation

  • victor Lyonnet, 2018. "Asset-liability management in life insurance: Evidence from France," Working Papers 2018-12, Center for Research in Economics and Statistics.
  • Handle: RePEc:crs:wpaper:2018-12
    as

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    File URL: http://crest.science/RePEc/wpstorage/2018-12.pdf
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    References listed on IDEAS

    as
    1. Gollier, Christian, 2008. "Intergenerational risk-sharing and risk-taking of a pension fund," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1463-1485, June.
    2. Flannery, Mark J & James, Christopher M, 1984. "Market Evidence on the Effective Maturity of Bank Assets and Liabilities," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 435-445, November.
    3. Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
    4. repec:eee:jbfina:v:79:y:2017:i:c:p:12-27 is not listed on IDEAS
    5. Robert McMenamin & Zain Mohey-Deen & Anna L. Paulson & Richard J. Rosen, 2012. "How liquid are U.S. life insurance liabilities?," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Sep.
    6. Bo Becker & Victoria Ivashina, 2015. "Reaching for Yield in the Bond Market," Journal of Finance, American Finance Association, vol. 70(5), pages 1863-1902, October.
    7. David T. Russell & Stephen G. Fier & James M. Carson & Randy E. Dumm, 2013. "An Empirical Analysis of Life Insurance Policy Surrender Activity," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 36(1), pages 35-57.
    8. Dietrich Domanski & Hyun Song Shin & Vladyslav Sushko, 2017. "The Hunt for Duration: Not Waving but Drowning?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(1), pages 113-153, April.
    9. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    10. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    11. Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, vol. 36(5), pages 1137-1170, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Insurance companies; life insurance; surrender risk; redemption risk.;

    JEL classification:

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

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