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.