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

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 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 paper 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. Terms of use: Documents in EconStor may

Why Insurance Regulation Is Crucial for Long-Term Investment and Economic Growth

“…In another study, based on a unique, confidential security-level dataset provided by Deutsche Bundesbank, Timmer (2016) finds that from 2005 to 2014 insurance companies and pension funds bought debt securities that were trading at a discount and sold securities that were trading at a premium, stabilizing the market by responding counter-cyclically to price changes. 2 This result reinforces the tentative evidence of Paulson and Rosen (2016), on the basis of US data from the 2008 financial crisis, that life insurers absorbed liquidity risk by purchasing less liquid bonds. However, this study did not find any increase in bond purchases by insurers during the crisis.…”