Are Insurance Company Lenders Dangerous?

The Journal of Financial and Quantitative Analysis has accepted the Erel-Inozemtsev paper for publication, according to Erel. The current version of the paper is a revision of a review paper that Erel posted on the web in 2021 and presented at a Federal Reserve Bank of Boston’s conference.

The paper: Erel, a finance professor at Ohio State, and Inozemtsev, a business faculty member at the University of Melbourne, acknowledge in their paper that the National Association of Insurance Commissioners oversees life insurers’ lending actively and that, because of regulatory constraints, insurers hold much higher-rated bonds than mutual funds tend to hold.

But Erel and Inozemtsev contend that active regulation of nonbanks could itself be a risk if poorly coordinated regulatory constraints force insurers to sell certain types of assets quickly and those “fire sales” lead to problems for banks.

The current shift to “mark to market” accounting, which may force insurers to post big losses if an economic crisis hurts the value of their bonds, could add to problems, the economists note.

With the mark-to-market rules in effect, “any downward pressure on portfolio holdings adversely affects capital requirements, leading to an asset sale and a further downward spiral in price,” the economists write.

Credit: Bruno Weltmann/Adobe Stock