Cover IMF Working Papers
Did Insurers Become Risk-Loving During “Low-for-Long”? The Role of Returns, Ratings, and Regulation
Author:
Jeroen Brinkhoff
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Mr. Juan Sole
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Series:
IMF Working Papers
Volume/Issue:
Volume 2022: Issue 202
Language:
English
Publication Date:
30 Sep 2022
DOI:
https://doi.org/10.5089/9798400222399.001
ISBN:
9798400222399
ISSN:
1018-5941
Pages:
20
Keywords:
Life Insurance sector; financial stability; credit ratings; bond revaluation; life insurance insurance company; bond portfolio; investment behavior; bond investor; Bonds; Insurance companies; Corporate bonds; Sovereign bonds; Bond ratings; Global
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European life insurance companies are important bond investors and had traditionally played a stabilizing role in financial markets by pursuing “buy-and-hold” investment strategies. However, since the onset of the ultra-low interest rates era in 2008, observers noted a decline in the credit quality of insurers’ bond portfolios. The commonly-held explanation for this deterioration is that low returns pushed insurers to become more risk-taking. We argue that other factors—such as surging rating downgrades, bond revaluations, and regulatory changes—also played a key role. We estimate that rating changes, revaluations, and search for yield each account for about one-third each of the total deterioration in credit quality. This result has important policy implications as it reestablishes the view that insurers’ investment behavior tends to be passive through the cycle—rather than risk-seeking.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2022: Issue 202