Asset-liability management in life insurance: Evidence from France

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.