Insurers increasing their appetite for risk when markets climb pose challenges when markets begin to experience corrections. Behavioral finance lessons apply now more than ever as markets continue to climb and risk appetite increases by investors and institutions.
Individuals behave in ways that often run counter to their self-interest—something that sophisticated life insurers would never succumb to. As some companies turn their backs on well-planned risk management strategies to manage product volatility, the question arises whether some life insurers are also acting against their better nature.
Like individual investors who have lost sight of their goals only to return to a prudent investment strategy after a financial crisis, some life insurers, which were exposed to the effects of the 2007-2008 recession, returned to the risk management fold at the bottom of the recession, often redoubling their risk management programs at a hefty price just after the tail event.
In this article, Milliman’s Ghalid Bagus and Suzanne Norman explore the drivers of this behavior and the impact it had during the last crisis.
Over the last decade, sales of variable annuities (VAs) with investment guarantees, equity-indexed annuities (EIA), and structured notes increased dramatically. What these products have in common is that they offer investors upside participation when the equity markets rally, while limiting the downside when markets decline.
A recent Milliman Insight article examines the impact of the financial crisis on guarantee products.
As a new risk management tool, catastrophic mortality risk securitization, enhances the capacity of the life insurance industry by transferring catastrophic mortality losses to the capital markets. Reinsurers are recognizing that, despite pooling their exposure to risk, they may not be able to handle the capital obligation brought about by a large-scale terrorist attack or, more likely, a pandemic. In turn, they are looking for alternative risk-transfer mechanisms in capital markets. For an increasing number of reinsurers (as well as primary insurers), mortality catastrophe bonds provide the answer.
A recent article by Milliman consultant Ghalid Bagus for Best’s Review digs into the details of mortality catastrophe bonds. Read the full article here.