Document Type

Article

Publication Date

2009

Publication Title

Journal of Insurance Regulation

Volume

27

Issue

3

Pages

67-90

Abstract

In the 1980s, life insurers sold guaranteed investment contracts (GICs) to pension plan sponsors, then backed these contracts with portfolios heavily weighted with higher risk assets such as common stocks and junk bonds. Ultimately this caused considerable loss, and history has repeated itself in many respects in recent years via holdings of equities and mortgage-backed securities. We evaluate the risky asset substitution in the life insurance industry from an historical perspective to determine if organizational form or other factors might be rationale for managerial decisions to engage in asset substitution. We find evidence that stock insurer managers are more likely than their mutual counterparts to engage in this type of risky asset substitution. Our findings provide rich ground for future research as the subprime mortgage and credit default swap debacles unfold, as well as public policy implications for insurance regulators concerned with the fiscal health of the insurance industry.

Comments

Permission to repost was given by the National Association of Insurance Commissioners. NAIC copyright regulations remain intact.

Original Publication Citation

Wells, B. P., Epermanis, K., Cox, L. A., & McShane, M. (2009). Risky asset substitution in the insurance industry: An historical example. Journal of Insurance Regulation, 27(3), 67-90.

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