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How Do Property and Casualty Insurers Manage Risk? The Role of Reinsurance
By tempering financial losses, the insurance industry lends resilience to the economy and helps homeowners and businesses recover from natural disasters and other catastrophes. In order to do this, however, the insurance industry must itself be resilient.
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How vulnerable are insurance companies to a downturn in the municipal bond market?
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 ...
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Privately Placed Debt on Life Insurers’ Balance Sheets: Part 2—Increasing Complexity
In this second part of our Chicago Fed Letter series on life insurers’ investments in private placements, we use novel data to assess the growing complexity and liquidity of these investments.1 We start by documenting that these investments have shifted toward issuers in financial and real estate sectors. We then show that this shift reflects more lending to asset managers, including private direct lending funds. One reason for this shift to financial issuers is that these private placements tend to be more complex and less liquid, resulting in higher yields. Lastly, we show that, while ...
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Catastrophe Bonds: A Primer and Retrospective
Since 1997, the catastrophe (CAT) bond market has provided the insurance industry with protections against natural disasters that have grown more frequent and costly. This article explains how CAT bonds work, and then looks at how the market for them has grown in size, coverage, and sophistication over the past two decades. It also explores how and why different types of institutions use CAT bonds to transfer insurance risks.
Newsletter
Privately Placed Debt on Life Insurers’ Balance Sheets: Part 1—A Primer
Life insurers buy long-term assets to match their long-term liabilities and hence are among the largest investors in corporate bonds.1 Over the past decade, insurance companies have shifted their corporate bond investments toward privately placed bonds (private placements). A private placement is an unregistered security that is sold to a limited pool of investors, primarily institutional investors, such as investment banks, pension funds, and insurers. While privately placed bonds accounted for 13% of life insurers’ bond investments in 2004, they accounted for over 20% in 2022 (figure 1).
Newsletter
Reinvesting After the Crisis: Changes in the Fixed-Income Portfolios of Life Insurers
The years following the Great Recession presented a unique set of challenges for life insurers even as the U.S. economic recovery began to gain momentum. Between the financial crisis in 2008 and the end of 2016, life insurers? policyholder liabilities grew 25%, from $2.6 trillion to $3.2 trillion, while their preferred investment habitat, the fixed-income securities market (excluding Treasury securities), grew by only 3%, from $22.0 trillion to $22.1 trillion.
Newsletter
The Growth and Challenges of Cyber Insurance
Cyberattacks have grown in frequency and cost over the past decade, with high-profile cases, such as the 2013 Target data breach, the 2017 Equifax data breach, and the leak of Democratic National Committee emails during the 2016 election making national headlines. Ransomware attacks, intellectual property theft, and fraud cost companies billions in recovery expenses, fines, and lost revenues every year. More firms are purchasing cyber insurance as a way to cover losses and expenses resulting from cyber incidents.