Essays on Insurance Asset-Liability Dynamics
My dissertation consists of three essays that explore the asset-liability dynamics of insurance companies and the impact of the opioid crisis on business credit. The first essay examines the impact of demand shocks on the investment decisions of insurers. Insurance companies are among the largest institutional investors, and their decisions have important implications for financial markets. Moreover, insurers' underwriting and investment operations are interdependent, and shocks to one can affect the other. Using variations in pandemic-related lockdowns and their impact on demand for auto insurance, the largest Property \& Casualty (P\&C) business line, I study the causal effect of demand shocks on insurers' investment strategies. I find firms experiencing weaker underwriting demand face lower capital requirements and choose to take more risk in their assets by investing in more speculative bonds. Results indicate a nuanced relationship between insurers' underwriting and investment operations. The second essay explores how the duration of assets held by P\&C insurers affects their pricing during periods of increasing interest rates. In a rapidly rising interest rate environment, insurers with longer asset duration face greater investment losses, avoid realizing them, and settle with lower investment yields. Using a difference-in-differences design, I show that these firms are at a disadvantage in the product market and cannot adequately adjust their prices to remain competitive. I find that insurers' tendency to hold bonds to maturity driven by historical cost accounting (HCA) impedes the transmission of monetary policies, specifically during aggressive tightening cycles. The third essay studies the impact of the opioid crisis on the credit status of businesses. Using an instrumental variable setup and leveraging the data on marketing campaigns of prescription opioid manufacturers, I show that local businesses operating in communities affected by the opioid crisis experience more delinquencies on loan payments both at the extensive and intensive margin. Additionally, I find that the effect is more pronounced among more vulnerable firms and communities.
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