Did Insurers Become Risk-Loving During “Low-for-Long”? The Role of Returns, Ratings, and Regulation
IMF Working Papers, September 30, 2022
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- Did Insurers Become Risk-Loving During “Low-for-Long”? The Role of Returns, Ratings, and Regulation
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Bibliographic details
- Authors: Jeroen Brinkhoff, Juan Sole
- Published: September 30, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400222399.001
Summary
- 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.
- 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 is that low returns pushed insurers to become more risk-taking.
- The authors argue that other factors—such as surging rating downgrades, bond revaluations, and regulatory changes—also played a key role.
- The paper estimates 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.
Key findings and quantitative estimates
- Rating changes account for about one-third of the total deterioration in credit quality.
- Bond revaluations account for about one-third of the total deterioration in credit quality.
- Search for yield accounts for about one-third of the total deterioration in credit quality.
- The study emphasizes that these three factors together explain the observed decline in credit quality during the ultra-low interest rates era beginning in 2008.
Policy implications
- Reestablishes the view that insurers’ investment behavior tends to be passive through the cycle rather than inherently risk-seeking.
- Suggests that regulatory changes and external credit-rating dynamics are important drivers of portfolio credit-quality shifts and deserve attention alongside return-driven incentives.
- Implies policy measures should consider the roles of rating downgrades and bond valuation mechanics when assessing insurer behavior and systemic stability.
Publication and metadata
- Authors: Jeroen Brinkhoff, Juan Sole
- Date: September 30, 2022
- Series: Working Paper No. 2022/202
- Issue: 202
- Volume: 2022
- Pages: 20
- DOI: https://doi.org/10.5089/9798400222399.001
- Stock No: WPIEA2022202
- ISBN: 9798400222399
- ISSN: 1018-5941
- Subjects: Bond ratings, Bonds, Corporate bonds, Financial institutions, Insurance companies, Sovereign bonds
- Keywords: bond investor, bond portfolio, Bond ratings, bond revaluation, Bonds, Corporate bonds, credit ratings, financial stability, Global, Insurance companies, investment behavior, life insurance insurance company, Life Insurance sector, Sovereign bonds
IMF Working Papers — Did Insurers Become Risk-Loving During “Low-for-Long”? The Role of Returns, Ratings, and Regulation (Jeroen Brinkhoff, Juan Sole), September 30, 2022.
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