The Fragility of Market Risk Insurance / Ralph Koijen, Motohiro Yogo.

By:

Koijen, Ralph

Contributor(s):

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w24182.Publication details: Cambridge, Mass. National Bureau of Economic Research 2018.Description: 1 online resource: illustrations (black and white)Subject(s):

G22 - Insurance • Insurance Companies • Actuarial Studies
G32 - Financing Policy • Financial Risk and Risk Management • Capital and Ownership Structure • Value of Firms • Goodwill

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Abstract: Insurers sell retail financial products called variable annuities that package mutual funds with minimum return guarantees over long horizons. Variable annuities accounted for $1.5 trillion or 35% of U.S. life insurer liabilities in 2015. Sales decreased and fees increased during the 2008 financial crisis as the higher valuation of existing liabilities stressed risk-based capital. Insurers also made guarantees less generous or stopped offering guarantees to reduce risk exposure. These supply-side effects persist long after the financial crisis in the low interest rate environment, and variable annuity insurers suffered especially low stock returns during the COVID-19 crisis. We develop an equilibrium model of insurance markets in which financial frictions and market power are important determinants of pricing, contract characteristics, and the degree of market incompleteness.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w24182 (Browse shelf(Opens below))	Not For Loan

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January 2018.

Insurers sell retail financial products called variable annuities that package mutual funds with minimum return guarantees over long horizons. Variable annuities accounted for $1.5 trillion or 35% of U.S. life insurer liabilities in 2015. Sales decreased and fees increased during the 2008 financial crisis as the higher valuation of existing liabilities stressed risk-based capital. Insurers also made guarantees less generous or stopped offering guarantees to reduce risk exposure. These supply-side effects persist long after the financial crisis in the low interest rate environment, and variable annuity insurers suffered especially low stock returns during the COVID-19 crisis. We develop an equilibrium model of insurance markets in which financial frictions and market power are important determinants of pricing, contract characteristics, and the degree of market incompleteness.