Impact of Insurance Companies’ Investment Policy on Risk Management in the Public Sector

Abstract

The aim of this chapter is to identify the areas where insurance companies’ investment policies influence risk management in the public sector and financial system stability in the European Union countries and to analyse the model of their investment portfolio allocation. The significance of the insurance sector for the public one is examined in the context of the so-called critical functions: (1) fulfilment of the function of insurance coverage; and (2) the mechanisms of long-term allocation of capital. The importance of insurance institutions both for the stability of the public sector and the whole economic system arises from the fact that these institutions perform the critical—from the perspective of society as well as the economy—function of insurance coverage which allows the management of risk and ensures continuity of operation. The capability of ensuring infallible fulfilment of insurance coverage constitutes a synthetic indicator of the stability of the socio-economic system. Performance of the functions of critical importance for the stability of the public sector by the insurance sector is also concerned with the mechanism of long-term allocation of capital, especially in the case of life insurance companies, which is invested in the financial market and in the real economy. The investment activities of insurance companies have an impact on the stability of the public sector, in particular: (1) by investing in instruments issued by the government, which is of particular systemic importance in the context of debt crisis in many EU member states; (2) by influencing the situation on the stock and bond markets, e.g. creating speculative bubbles, assets fire sale; (3) by transforming capital into investment in the real economy sector—an effect on the real economy through over-rating some sectors at the expense of others, thus determining the cost of capital. Activity of insurance companies on the market of public debt is of immense importance for risk management in the public sector.