Luciano, Elisa and Rochet, Jean-Charles (2022) The Fluctuations of Insurers’ Risk Appetite. Journal of Economic Dynamics and Control, vol.144.

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Identification Number : 10.1016/j.jedc.2022.104543


The risk appetite of insurance companies fluctuates over time in a quasi cyclical fashion. When their capitalization is high (low), companies choose portfolios with a high (small) share of risky assets. We show that this phenomenon has the same source as the underwriting cycle, namely recapitalization costs. We build a dynamic stochastic general equilibrium model of the insurance sector where financial frictions prevent companies from maintaining a target leverage. Portfolio decisions of insurers fluctuate with their aggregate capitalization. The model rationalizes two apparently disjoint pieces of evidence: long-standing empirical evidence on underwriting cycles and more recent evidence on the fluctuations of insurance companies’ risk appetite.

Item Type: Article
Language: English
Date: November 2022
Refereed: Yes
Place of Publication: Amsterdam
JEL Classification: G11 - Portfolio Choice; Investment Decisions
G12 - Asset Pricing; Trading volume; Bond Interest Rates
G23 - Pension Funds; Other Private Financial Institutions
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 28 Mar 2023 10:48
Last Modified: 30 Mar 2023 12:32
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