The cost of financial frictions for life insurers
Journal
American Economic Review
Subject
Finance
Publishing details
Authors / Editors
Koijen R;Yogo M
Publication Year
2015
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.
Keywords
Financial crises; Insurance; Insurance companies; Actuarial studies; Financial institutions and services; Financing policy
Available on ECCH
No