We propose several econometric measures of connectedness based on principal-components analysis and Granger-causality networks, and apply them to the monthly returns of hedge funds, banks, ...broker/dealers, and insurance companies. We find that all four sectors have become highly interrelated over the past decade, likely increasing the level of systemic risk in the finance and insurance industries through a complex and time-varying network of relationships. These measures can also identify and quantify financial crisis periods, and seem to contain predictive power in out-of-sample tests. Our results show an asymmetry in the degree of connectedness among the four sectors, with banks playing a much more important role in transmitting shocks than other financial institutions.
During the financial crisis, life insurers sold long-term policies at deep discounts relative to actuarial value. The average markup was as low as—19 percent for annuities and — 57 percent for life ...insurance. This extraordinary pricing behavior was due to financial and product market frictions, interacting with statutory reserve regulation that allowed life insurers to record far less than a dollar of reserve per dollar of future insurance liability. We identify the shadow cost of capital through exogenous variation in required reserves across different types of policies. The shadow cost was $0.96 per dollar of statutory capital for the average company in November 2008.
CHALLENGES OF ISLAMIC INSURANCE Abidi, Ilyes; Nsaibi, Mariem; Regaieg, Boutheina
International journal of economics and financial issues,
01/2020, Volume:
10, Issue:
4
Journal Article
Peer reviewed
Open access
The aim of this paper is to study the stability of insurance companies. The majority of works on this topic has focused on the determinants of financial stability. Therefore, they interested in the ...Z-score, focused on the ROA, as well as the panel method. Unlike previous work, we have formed a score made up of indicators of efficiency, effectiveness, profitability, solvency, productivity, investment and risk, as well as macroeconomic indicators. Our sample consists of 30 insurance companies, 15 of which are shariaa compatible. The choice of these companies is justified by their contribution to the total assets of the both types of finance. This selection method allowed us to have a global idea on the effectiveness, efficiency, risk and stability of the two insurance sectors. The analysis of the stability scores, determined using the scoring and logit transformation method, revealed that Islamic insurance companies are more stable than conventional insurance companies. From a risk perspective, Islamic insurance companies are less risky than conventional insurance companies. They lose, on average, 1.598% of their assets against 3.704% for conventional insurance companies. This observation related to three types of risk, namely; liquidity risk, market risk and credit risk. Furthermore, this empirical investigation revealed that takaful companies are not immune to the toxic funds of the crisis. Likewise, we note that Islamic insurance companies are sensitive to political shocks such as that of the Arab revolutions that took place in 2011.
The impact of insurer competition on welfare, negotiated provider prices, and premiums in the U.S. private health care industry is theoretically ambiguous. Reduced competition may increase the ...premiums charged by insurers and their payments made to hospitals. However, it may also strengthen insurers' bargaining leverage when negotiating with hospitals, thereby generating offsetting cost decreases. To understand and measure this trade-off, we estimate a model of employer-insurer and hospitalinsurer bargaining over premiums and reimbursements, household demand for insurance, and individual demand for hospitals using detailed California admissions, claims, and enrollment data. We simulate the removal of both large and small insurers from consumers' choice sets. Although consumer welfare decreases and premiums typically increase, we find that premiums can fall upon the removal of a small insurer if an employer imposes effective premium constraints through negotiations with the remaining insurers. We also document substantial heterogeneity in hospital price adjustments upon the removal of an insurer, with renegotiated price increases and decreases of as much as 10% across markets.
Reaching for Yield in the Bond Market BECKER, BO; IVASHINA, VICTORIA
The Journal of finance (New York),
October 2015, Volume:
70, Issue:
5
Journal Article
Peer reviewed
Open access
This paper studies reaching for yield—investors' propensity to buy riskier assets to achieve higher yields—in the corporate bond market. We show that insurance companies reach for yield in choosing ...their investments. Consistent with lower rated bonds bearing higher capital requirements, insurance firms prefer to hold higher rated bonds. However, conditional on credit ratings, insurance portfolios are systematically biased toward higher yield, higher CDS bonds. This behavior is related to the business cycle being most pronounced during economic expansions. It is also characteristic of firms with poor corporate governance and for which the regulatory capital requirement is more binding.
We examine whether the concern about insurers selling similar assets due to an overlap in holdings is justified. We measure this overlap using cosine similarity and find that insurers with more ...similar portfolios have larger subsequent common sales. When faced with a shock to assets or liabilities, exposed insurers with greater portfolio similarity have larger common sales that impact prices. Our portfolio similarity measure can be used by regulators to predict the common selling of any institution that reports security or asset class holdings, making the measure a useful ex ante predictor of divestment behavior in times of market stress.
This paper investigates fire sales of downgraded corporate bonds induced by regulatory constraints imposed on insurance companies. As insurance companies hold over one-third of investment-grade ...corporate bonds, the
collective need to divest downgraded issues may be limited by a scarcity of counterparties. Using insurance company transaction data, we find that insurance companies that are relatively
more constrained by regulation are more likely to sell downgraded bonds. Bonds subject to a high probability of regulatory-induced selling exhibit price declines and subsequent reversals. These price effects appear larger during periods when the insurance industry is relatively distressed and other potential buyers' carpital is scarce.
We conduct a series of field experiments to evaluate the quality of advice provided by life insurance agents in India. Agents overwhelmingly recommend unsuitable, strictly dominated products that ...provide high commissions to the agent. Agents cater to the beliefs of uninformed consumers, even when those beliefs are wrong. We also find that agents appear to focus on maximizing the amount of premiums (and therefore their commissions) that customers pay, as opposed to focusing on how much insurance coverage customers need. A natural experiment requiring disclosure of commissions for a specific product results in agents recommending alternative products with high commissions but no disclosure requirement. A follow-up agent survey sheds light on the extent to which poor advice reflects both the commission incentives and agents’ limited product knowledge.
This paper contrasts the investment behavior of different financial institutions in debt securities as a response to past returns. For identification, I use unique security-level data from the German ...Microdatabase Securities Holdings Statistics. Banks and investment funds respond in a procyclical manner to past security-specific holding period returns. In contrast, insurance companies and pension funds act countercyclically; they buy when returns have been negative and sell after high returns. The heterogeneous responses can be explained by differences in their balance sheet structure. I exploit within-sector variation in the financial constraint to show that tighter constraints are associated with relatively more procyclical investment behavior.
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