Andrew Ellul, Chotibhak Jotikasthira, Anastasia Kartasheva, Christian Lundblad, Wolf Wagner, 05 June 2018

Systemic risk analyses have largely focused on the linkages among financial institutions’ funding arrangements, but there are increasing connections between insurers and the rest of the financial system. This column explores how systemic risk can originate from insurers’ business models. In the event of negative asset shocks, insurers’ collective allocation to illiquid bonds leads to an amplification of system-wide fire sales. These dynamics can plausibly erase up to 20-70% of insurers’ aggregate equity capital.

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