The Insurer Channel of Monetary Policy

IMF Working Papers, March 14, 2025

Source details

Study of the role of life insurers in the transmission of US monetary policy.
Insurers have uniquely long-term liabilities.
Insurers face a trade-off between matching liability duration exposure by investing in long-term government debt and earning higher yields by shifting to risky—but shorter-term—private debt.
Long-term risk free rates play a critical role in shaping insurers' demand for risky private debt.
Contractionary monetary policy shocks that raise long-term risk-free rates reduce insurers' demand for private debt, raising risk premia.
Granular, high frequency data and regulatory changes are used to trace how insurers' investment behavior transmits monetary policy shocks to risk premia.

Liability duration exposure leads insurers to prefer long-term government debt for duration matching.
A trade-off exists: matching duration with long-term government debt versus earning higher yields by shifting to risky, shorter-term private debt.
Changes in long-term risk-free rates alter this trade-off and thereby insurers' demand for private debt.
Contractionary monetary policy shocks that raise long-term risk-free rates:
- reduce insurers' demand for private debt;
- raise risk premia.

Analysis uses granular, high frequency data.
Regulatory changes are exploited as part of the identification strategy to trace transmission from insurers' investment behavior to risk premia.

Long-term risk-free rates are a critical transmission channel: monetary policy that affects long-term rates will influence insurers' portfolio allocation between government and private debt.
Changes in insurers' demand for private debt can materially affect risk premia in securities markets, with implications for financial markets and financial institutions, particularly insurance companies and other NBFIs.

Italic source attribution: IMF Working Papers — "The Insurer Channel of Monetary Policy" by Divya Kirti and Akshat V. Singh, March 14, 2025.