Rising interest rates and liquidity risk in the life insurance sector

  • This paper sheds light on the life insurance sector’s liquidity risk exposure. Life insurers are important long-term investors on financial markets. Due to their long-term investment horizon they cannot quickly adapt to changes in macroeconomic conditions. Rising interest rates in particular can expose life insurers to run-like situations, since a slow interest rate passthrough incentivizes policyholders to terminate insurance policies and invest the proceeds at relatively high market interest rates. We develop and empirically calibrate a granular model of policyholder behavior and life insurance cash flows to quantify insurers’ liquidity risk exposure stemming from policy terminations. Our model predicts that a sharp interest rate rise by 4.5pp within two years would force life insurers to liquidate 12% of their initial assets. While the associated fire sale costs are small under reasonable assumptions, policy terminations plausibly erase 30% of life insurers’ capital due to mark-to-market accounting. Our analysis reveals a mechanism by which monetary policy tightening increases liquidity risk exposure of non-bank financial intermediaries with long-term assets.

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Metadaten
Author:Christian KubitzaGND, Elia BerdinORCiDGND, Helmut GründlGND
URN:urn:nbn:de:hebis:30:3-772468
URL:https://www.icir.de/fileadmin/user_upload/editors/documents/working_papers/wp_29_ir_rise_wp_2019_03_01.pdf
Series (Serial Number):ICIR Working Paper Series (No. 29/17 [1.3.19])
Publisher:International Center for Insurance Regulation
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2019
Year of first Publication:2019
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2024/03/28
Tag:Financial stability; Insurance companies; Liquidity risk; Mark-to-market accounting; Monetary policy transmission; Systemic risk
Edition:Version: March 1, 2019
Page Number:71
HeBIS-PPN:516922874
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:E Macroeconomics and Monetary Economics / E5 Monetary Policy, Central Banking, and the Supply of Money and Credit / E52 Monetary Policy
G Financial Economics / G2 Financial Institutions and Services / G22 Insurance; Insurance Companies
G Financial Economics / G2 Financial Institutions and Services / G28 Government Policy and Regulation
G Financial Economics / G3 Corporate Finance and Governance / G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht