How the Financial Crisis Affects Pensions and Insurance and Why the Impacts Matter
IMF Working Papers, July 1, 2009
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Bibliographic details
- Authors: Ian Tower, Gregorio Impavido
- Published: July 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451872989.001
Overview
- This Working Paper discusses the key sources of vulnerabilities for pension plans and insurance companies in light of the global financial crisis of 2008.
- It analyzes how these institutional investors transmit shocks to the rest of the financial sector and economy.
- The crisis re-ignited policy debates on multiple issues affecting pensions and insurance.
Key sources of vulnerability
- Asset volatility and investment risk affecting pension assets and insurance company portfolios.
- Balance sheet pressures from marked-based valuation rules.
- Interest rate risk and its effects on rates of return and liabilities.
- Group-level risks associated with holding company structures and large complex financial institutions.
Channels of transmission to the financial sector and economy
- Institutional investors (pensions and insurance) can amplify market shocks through asset reallocation and fire sales.
- Funding shortfalls in pension plans and solvency strains in insurance companies can propagate stress to counterparties and financial markets.
- Market valuation practices affect perceived solvency and can trigger procyclical behavior.
Policy issues and recommendations
- Need for countercyclical funding and solvency rules to mitigate procyclicality.
- Tradeoffs implied by mark-to-market valuation rules, including volatility passed to contributors and beneficiaries.
- Protection of contributors toward retirement from excessive market volatility.
- Strengthening group supervision for large complex financial institutions, including insurance and pensions.
- Revisiting resolution and crisis management frameworks for insurance and pensions to handle systemic events.
Summary findings (as stated)
- The crisis highlights vulnerabilities in pensions and insurance stemming from asset volatility, valuation rules, funding practices, and supervisory gaps.
- Policy responses should focus on reducing procyclicality, protecting retirement contributors, enhancing supervision, and improving resolution frameworks.
IMF Working Paper No. 2009/151; Ian Tower and Gregorio Impavido; July 1, 2009; Pages: 56; Volume: 2009; Issue: 151; DOI: https://doi.org/10.5089/9781451872989.001; Stock No: WPIEA2009151; ISBN: 9781451872989; ISSN: 1018-5941.