It shows a high correlation, with rises in equity prices inducing reallocations into equities. This suggests a potentially significantly pro-cyclical swing in portfolio behaviour. For example, a 10% rise in the S&P on average increases the equity portfolio share by over one percentage point – or around $ billion given the scale of US life insurers’ balance sheets. 6 If done quickly, this could be a potent procyclical amplifier. Similar patterns are evident among life insurers in other countries. A second piece of indirect evidence comes from the behaviour of regulators. There have been several incidences over recent years of regulators loosening regulatory constraints to forestall concerns about pro-cyclical behaviour in a downswing. For example, UK regulators loosened regulatory constraints on insurance companies in the early 2000s following the bursting of the dotcom bubble. This was due to fears of selling pressure on equities being amplified as insurance companies de-risked their portfolios as they neared regulatory constraints. Pension fund regulators have taken similarly-motivated actions recently due to depressed real yields boosting the market value of liabilities. A third piece of evidence comes from analysing the impact of ICPF asset allocation decisions on asset prices. In particular, at the Bank we have analysed the impact of purchases of longterm UK indexed-linked debt by UK ICPFs since the early 1990s (Zinna (2014)). Over this period, the combination of accounting and regulatory rules led to large cumulative purchases of long-term government debt by ICPFs. At the same time, long-term real yields fell from around 4% to around –1%.

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