The Cost of Financial Frictions for Life Insurers
American Economic Review
vol. 105,
no. 1, January 2015
(pp. 445-75)
Abstract
During the financial crisis, life insurers sold long-term policies at deep discounts relative to actuarial value. The average markup was as low as -19 percent for annuities and -57 percent for life insurance. This extraordinary pricing behavior was due to financial and product market frictions, interacting with statutory reserve regulation that allowed life insurers to record far less than a dollar of reserve per dollar of future insurance liability. We identify the shadow cost of capital through exogenous variation in required reserves across different types of policies. The shadow cost was $0.96 per dollar of statutory capital for the average company in November 2008. (JEL G01, G22, G28, G32)Citation
Koijen, Ralph S. J., and Motohiro Yogo. 2015. "The Cost of Financial Frictions for Life Insurers." American Economic Review, 105 (1): 445-75. DOI: 10.1257/aer.20121036Additional Materials
JEL Classification
- G01 Financial Crises
- G22 Insurance; Insurance Companies; Actuarial Studies
- G28 Financial Institutions and Services: Government Policy and Regulation
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill