doi: 10.1016/S0378-4266(01)00166-2īaranoff EG, Sager TW (2003) The Interrelationship among Organizational and Distribution Forms and Capital and Asset Risk Structures in the Life Insurance Industry. doi: 10.1257/aer.20120555īaranoff EG, Sager TW (2002) The Relations among Asset Risk, Product Risk, and Capital in the Life Insurance Industry. (2010) Measuring Systemic Risk, In Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance, New York: John Wiley & Sons, 87–120.Īcharya VV, Engle R, Richardson M (2012) Capital Shortfall: A New Approach to Ranking and Regulating Systemic Risks. life insurance industry in danger of systemic risk by using derivative hedging prior to the 2008 financial crisis?. variable annuities with guaranteed benefits (VAGB),Ĭitation: Etti G.Third, we add to the discussion of Systemically Important Financial Institutions (SIFIs). The 2008 crisis period provides a unique laboratory to test this and other theories of risk behavior. Second, we provide a new quantitative tool to assess the potential for the contagion of risk to spread from guarantors (banks) of life insurer derivative hedges to the life insurance sector by failure of the guarantors to perform. Our contribution is three-fold: First, we demonstrate the possibility of endemic misperception of risk within a financial sector.
We find that the life insurance industry was relatively diversified. As part of our analysis, we introduce a new methodology for assessing the diversification of life insurers, both individually and as an industry, with respect to their counterparties (banks) in derivative hedging. Second, we assess the cumulative magnitude of all derivative risks (including VAGB risks) and find that they probably do not rise to level of a systemic threat. Our analysis suggests that those risks were insufficiently hedged. But the guarantees expose insurers to market risk. With USD 1.6 trillion in contracts under guarantees, VAGB had become a vast and lucrative part of life insurer activities. First, we present evidence that the life insurance industry insufficiently appreciated the risks of variable annuities with guaranteed benefits (VAGB) in the run-up to the 2008 crisis. This paper is an historical studyjwith implications for the presentjof the extent to which the life insurance industry contributed to systemic risk prior to the 2008 financial crisis by using derivatives to hedge product and asset risks.
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