The Insurer Channel of Monetary Policy

We study the role of life insurers in the transmission of US monetary policy. Insurers have uniquely long-term liabilities. We posit that they face a trade-off between matching liability duration exposure by investing in long-term government debt and earning higher yields by shifting to risky—but shorter-term—private debt. We show that, due to this tradeoff, long-term risk free rates play a critical role in shaping insurers' demand for risky private debt. Contractionary monetary policy shocks that raise long-term risk-free rates reduce insurers' demand for private debt, raising risk premia. We use granular, high frequency data and regulatory changes to trace how insurers' investment behavior transmits monetary policy shocks to risk premia.