The Interplay between Insurers' Financial and Asset Risks during the Crisis of 2007-2009

In this study we compare the interplay between capital and asset risks before and during the 2007-2009 financial crisis for the U.S. life and health insurance industries partitioned into segments by product specialisation, size and governance. The results show substantial intra-industry variation in the partial elasticity of capital with respect to asset risk, as well as significant impact of the crisis. Segment variation was driven by product focus. Most notable is the greater impact of the crisis on the U.S. insurers specialising in annuities (least risky product) than on specialists in health lines (riskiest product). During the crisis, the elasticity between asset risk and capital declined for all segments indicating that insurers' operation may have shifted from offsetting risk to seeking risk.