If another major financial crisis hits the United States, life insurers can expect a "severe shock" to the prices of their asset holdings, according to a new research report by the Federal Reserve Bank of Chicago. However, a "significant" portion of the losses would be offset by gains on liabilities, according to findings of the report published by industry journal LifeHealthPro.  

Published as a Chicago Fed letter, much of the April 2013 paper, "What do U.S. life insurers invest in?" is a primer on life insurance's role in the economy, with a discussion of general accounts and separate accounts and their roles.

The study, conducted by analysts with the Fed's Insurance Initiative, notes that U.S. life insurance companies own more than $5.5 trillion in real and financial assets and provide funding to other sectors of the economy through their investment activities. Insurance companies are a critical source of funding for corporations, as well as for city and state governments: Insurance companies hold 20 percent of all corporate and foreign bonds and 15 percent of all municipal debt.

"Our back-of-the-envelope calculations suggest that a severe shock to asset prices could reduce the value of the industry's investments by 7.8 percent, or $280 billion, using third-quarter 2012 data," the analysts noted. This corresponds to an 86 percent loss in total industry equity, or $325 billion.

"However, because insurers make investments to match liabilities, these losses would be partially offset by gains on insurance liabilities," the analysts figured. They estimated that 74 percent of the hypothetical loss in assets from a severe price shock would be offset by gains on insurance liabilities.

A paper published in September by the Fed describes the liquidity of various life insurance products and provides a measure it says can be used to characterize the liquidity of the liabilities of the industry as a whole or of a particular firm.

"Although life insurers generally have less liquidity risk than banks, they are not immune from runs," that paper concluded.