Saturday, Jan. 7, 2017 3:15 PM – 5:15 PM
- Chair: Motohiro Yogo, Princeton University
Portfolio Similarity and Asset Liquidation in the Insurance Industry
AbstractThe designation of insurance companies as Systemically Important Financial Institutions (SIFI) explicitly considers the potential for the interconnectedness of their portfolios to affect the asset liquidation channel of systemic risk transmission. In this paper, we study the determinants and effects of interconnectedness on the selling behavior of insurers using cosine similarity. We document that greater portfolio similarity between two insurers is significantly related to the similarity in insurers' asset liquidation decisions. This relationship is stronger when both insurers are capital constrained but only at the asset class level suggesting that correlated re-balancing to improve capital ratios occurs at a higher level than individual securities. We find that the relationship between the portfolio holdings of both illiquid securities and downgraded issuers and sales similarity is greater during the financial crisis. In addition, we show that portfolio similarity cannot be explained by easily observable characteristics such as return correlation, concentration or assets under management. We interpret our findings to mean that the co-investment decisions of insurers under many different economic conditions are an important determinant of selling behavior. Overall, our paper provides an implementable mechanism to identify and monitor the interconnectedness of insurance company portfolios.
Securities Lending as Wholesale Funding: Evidence From the United States Life Insurance Industry
AbstractThe existing literature implicitly or explicitly assumes that securities lenders primarily respond to demand from borrowers and reinvest their cash collateral through short-term markets. Using a new dataset that matches every US life insurers' bond portfolio as well as their lending and reinvestment decisions to the universe of securities lending transactions, we offer compelling evidence for an alternative strategy, in which securities lending programs are used to finance a portfolio of long-dated assets. We discuss how the liquidity and maturity mismatch associated with using securities lending as a source of wholesale funding could potentially impair the functioning of securities market.
Capital Regulation and Product Market Outcomes
AbstractThis paper examines the impact of the introduction of a risk-based capital regulation regime on product market outcomes for the insurance industry in the UK. Using proprietary data on stress-test submissions from the Bank of England, we develop a measure of firm-level shocks to regulatory constraints that is plausibly exogenous to shifts in insurance demand. We find that constrained firms reduced underwriting relative to unconstrained firms, particularly for traditional insurance products which became more capital intensive in the new regulatory regime. The reduction in underwriting was not as pronounced for linked products, products that are mainly investment vehicles like mutual funds, implying a shift in the equilibrium product mix from traditional to linked. We also show that a higher proportion of constrained firms restructured their balance sheets by transferring assets and liabilities and went through reorganizations i.e. a change in legal owner of the firm.
- G2 - Financial Institutions and Services