Sectoral Asset Concentrations and Insurance Solvency Regulation

Abstract

Historical evidence, like the global financial crisis from 2007–2009, highlights that sectoral asset concentrations can play an important role in the solvency of insurers. Yet, current regulatory frameworks, such as the U.S. risk-based capital (RBC) framework, neglect sectoral asset concentrations in the determination of capital requirements, potentially underestimating the asset portfolio’s systematic loss exposure and reducing incentives for corresponding risk mitigation. By creating a detailed data sample of U.S. insurers’ asset holdings from 2009 to 2018 by means of their statutory filings, we find that insurers concentrate their assets particularly toward the financial, public, and real estate sector and that sectoral asset concentrations toward the public sector are associated with improved solvency, while concentrations toward the real estate sector weaken solvency. Our findings can serve as a starting point to revise current regulatory practices, particularly in terms of creating proactive incentives for insurers to mitigate the accumulation of systematic risk exposures associated with sectoral asset concentrations.