Problems with life and annuity issuers' commercial real estate could cause headaches for the issuers in a severe crisis but are unlikely to knock down the U.S. financial system.
A severe slump could wipe out more than 20% of the capital at about 16 insurers, including four insurers with more than $10 billion in assets, according to a team of three researchers at the Federal Reserve Bank of Chicago.
But only about five of those insurers have life insurance policies, annuities, institutional arrangements or other products set up in such a way that the customers could run in and pull out more than about 20% of their assets or account value quickly, the researchers report.
"The evidence presented here is consistent with the interpretation that life insurers are asset insulators," rather than companies that would make the heat from an asset-driven economic crisis hotter, the researchers write.
Jordan Brown, Ralf Meisenzahl and Andy Polacek present their analysis in a new paper prepared for the bank's Economic Perspectives journal.
What it means: The Fed is counting on life insurers' ability to lock your clients' life and annuity assets in to stabilize the U.S. financial system.
Commercial real estate: The COVID-19 pandemic caused severe, short-term problems for hotels.
Since then, hotel revenue and hotel investments values have recovered, but some observers worry that the "work from home" efforts have caused a permanent effect on many U.S. employers' need for office space.
Some owners have had a hard time finding tenants.
Meanwhile, because of an increase in interest rates in the past two years, owners that bought buildings using short-term, low-rate mortgage loans have had a hard time replacing the old loans with new loans that they can afford.
The office mortgage loan refinancing crisis and the COVID occupancy slump have pushed office prices down 40% or more in some markets.
