How vulnerable are insurance companies to a downturn in the municipal bond market?

Abstract: As the U.S. economy remains weakened by the Covid-19 pandemic, concern persists for the health and resilience of the municipal bond market. Municipal bonds (muni bonds) are debt securities issued by state and local governments to raise money and are generally considered to be safe investments. However, the recent slowdown in economic activity due to Covid-19 created significant stress on state and local government budgets, leading to a heightened risk for municipal bond downgrades and possibly even defaults. In this Chicago Fed Letter, we examine to what extent property and casualty (P&C) and life insurance companies, which are among the largest direct institutional investors in the municipal bond market, are vulnerable to a significant downturn in the muni bond market.

Keywords: Municipal Bonds; Insurance Company Investments; COVID-19 Economic Impact; State and local budget and expenditures; Scenario Analysis;

JEL Classification: G22; H50; H70; H71; H72;

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Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Chicago Fed Letter

Publication Date: 2021-02-02

Issue: 451

Pages: 7