IMF Working Papers

Did Insurers Become Risk-Loving During “Low-for-Long”? The Role of Returns, Ratings, and Regulation

By Jeroen Brinkhoff, Juan Sole

September 30, 2022

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Jeroen Brinkhoff, and Juan Sole. Did Insurers Become Risk-Loving During “Low-for-Long”? The Role of Returns, Ratings, and Regulation, (USA: International Monetary Fund, 2022) accessed December 25, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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. However, 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 for this deterioration is that low returns pushed insurers to become more risk-taking. We argue that other factors—such as surging rating downgrades, bond revaluations, and regulatory changes—also played a key role. We estimate 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.

Keywords: Credit ratings, Financial stability, Life Insurance sector

Publication Details

  • Pages:

    20

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

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  • Series:

    Working Paper No. 2022/202

  • Stock No:

    WPIEA2022202

  • ISBN:

    9798400222399

  • ISSN:

    1018-5941