Publications
Publications
- Forthcoming
- Review of Financial Studies
Regulatory Limits to Risk Management
By: Ishita Sen
Abstract
Variable annuities, the largest liability of U.S. life insurers, are investment products containing long-dated minimum return guarantees. I show that guarantees with similar economic risks are treated differently by regulation and these differences impact insurers’ hedging behavior. When the regulatory regime recognizes certain risks, insurers start to hedge these risks in a substantial way. For some guarantees, this involves hedging both interest rate and equity-market risks. However, for others, it involves hedging only equity-market risk. As the regulatory regime still does not recognize the interest rate risk of all guarantees, insurers remain exposed to substantial interest rate risk.
Keywords
Interest Rate Risk; Variable Annuities; Capital Regulation; Reinsurance; Derivatives; Risk Management; Interest Rates; Governing Rules, Regulations, and Reforms
Citation
Sen, Ishita. "Regulatory Limits to Risk Management." Review of Financial Studies (forthcoming). (Pre-published online October 31, 2022.)