TY  - UNPD
A1  - Kubitza, Christian
A1  - Berdin, Elia
A1  - Gründl, Helmut
T1  - Rising interest rates and liquidity risk in the life insurance sector
N2  - This paper sheds light on the life insurance sector’s liquidity risk exposure. Life insurers are important long-term investors on financial markets. Due to their long-term investment horizon they cannot quickly adapt to changes in macroeconomic conditions. Rising interest rates in particular can expose life insurers to run-like situations, since a slow interest rate passthrough incentivizes policyholders to terminate insurance policies and invest the proceeds at relatively high market interest rates. We develop and empirically calibrate a granular model of policyholder behavior and life insurance cash flows to quantify insurers’ liquidity risk exposure stemming from policy terminations. Our model predicts that a sharp interest rate rise by 4.5pp within two years would force life insurers to liquidate 12% of their initial assets. While the associated fire sale costs are small under reasonable assumptions, policy terminations plausibly erase 30% of life insurers’ capital due to mark-to-market accounting. Our analysis reveals a mechanism by which monetary policy tightening increases liquidity risk exposure of non-bank financial intermediaries with long-term assets.
T3  - ICIR Working Paper Series - No. 29/17 [1.3.19] 
KW  - Insurance companies
KW  - Liquidity risk
KW  - Systemic risk
KW  - Monetary policy transmission
KW  - Financial stability
KW  - Mark-to-market accounting
Y1  - 2019
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/77246
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30:3-772468
UR  - https://www.icir.de/fileadmin/user_upload/editors/documents/working_papers/wp_29_ir_rise_wp_2019_03_01.pdf
PB  - International Center for Insurance Regulation
CY  - Frankfurt am Main
ER  -