The impact of peer effects and economic policy-related uncertainty on U.S. life insurers' investment decisions

Abstract

This paper examines the impact of peer evaluation and economic policy-related uncertainty on insurers’ investment decisions in the U.S. life insurance industry. Using data from 567 U.S. life insurers, we find that U.S. life insurers’ investment decisions are significantly positively associated with peer insurers’ investment decisions, consistent with the learning peer channel hypothesis. In addition, we find that when the country’s economic policy-related uncertainty is higher, insurance firms are more likely to lower their investment, which supports the wait-and-see hypothesis. We further investigate the effect of government crisis interventions on life insurer investment, considering policy-related uncertainty. The results indicate that liquidity support and nationalisation policies encourage insurers’ investment decisions. We also perform alternative checks to address endogeneity concerns. The results mostly support our earlier findings. However, the results on the sensitivity of investment to peer effects and policy-related uncertainty vary. The results are robust to controls for various attributes, such as insurer characteristics, peer insurer characteristics, economic policy-related uncertainty and government crisis interventions.