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SUMMARY:Insurers as Asset Managers and Systemic Risk
DTSTART:20180306T120000
DTEND:20180306T130000
DTSTAMP:20260510T220905Z
UID:790d04dfe09ddd5d96e1f9017223eab43c4c8c2ec5b1ae52ea78fa47
CATEGORIES:Conferences - Seminars
DESCRIPTION:Anastasia KARTASHEVA (Bank for International Settlements)\nAss
 et fire sales arguably play a critical role in the propagation of systemic
  risk. We propose a new mechanism whereby financial institutions’ busine
 ss models engender correlated asset portfolios\, increasing vulnerability 
 to fire-sales. We use as our laboratory the U.S. life insurance industry\,
  which has experienced a major transformation with the significant expansi
 on of variable annuity (VA) investment products with guarantees\, against 
 which insurers have to post reserves and regulatory capital. We develop a 
 theoretical model in which an insurer hedges its guarantee exposure\, and\
 , as a result\, is incentivized to invest in illiquid assets. In the event
  of an asset shock or a shock to the value of the guarantee\, insurers eng
 age in fire sales to maintain their capital ratios. Using insurer-level da
 ta\, we calibrate the model and confirm that insurers operating in the VA 
 space invest in riskier portfolios\, sharing common allocations to illiqui
 d bonds. In a simulation exercise\, we subject the insurers to various sho
 cks and show that the system-wide fire-sale costs\, directly attributable 
 to VAs\, can plausibly erase up to 30% of the insurers’ total capital an
 d surplus. Given the widespread nature of potentially underfunded guarante
 es (e.g.\, pension funds)\, the implications of our findings are not restr
 icted to the insurance sector.
LOCATION:UNIL\, Extranef\, room 126 https://planete.unil.ch/plan/?local=EX
 T-126
STATUS:CONFIRMED
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