The Cost of Financial Frictions for Life Insurers
Ralph S. J. Koijen, Motohiro Yogo
American Economic Review · 2015 · Volume 105 · Issue 1
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)
Keywords
Financial Crises, Insurance, Insurance Companies, Actuarial Studies, Financial Institutions and Services: Government Policy and Regulation, Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
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