Life insurers’ asset risk during the financial crisis: evidence from Italy

Financial markets responded to the crisis by enhancing managerial and supervisory actions on risk-taking activities of firms. The aim of this work is to analyze changes in life insurers’ asset risk profile during the period 2005-2012. We focus on the Italian market due to the importance of its diversified life insurance sector, its recent volatility and its compliance with European and country-specific regulation. We test the finite risk hypothesis which predicts a negative correlation between asset risk and other firm-specific risk-increasing factors, in particular product mix, size and specialization. We also contribute to existing literature by considering the effects of the adoption of specific bancassurance models on the level of asset risk. Finally, we consider the effects of external shocks, such as the macroeconomic consequences of the financial crisis and regulatory changes. Our results show that life insurers present a relatively prudent level of exposure, which is negatively correlated with firm factors enhancing the overall risk profile. Stronger bancassurance models confirm this relationship. Finally, asset risk exposure did not decrease significantly as a result of the financial crisis, pointing at the effectiveness of regulatory restrictions on investments or a contingent search for yields.