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The cost of financial frictions for life insurers

Author(s): Koijen, RSJ; Yogo, Motohiro

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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.
Publication Date: Jan-2015
Citation: Koijen, RSJ, Yogo, M. (2015). The cost of financial frictions for life insurers. American Economic Review, 105 (1), 445 - 475. doi:10.1257/aer.20121036
DOI: doi:10.1257/aer.20121036
ISSN: 0002-8282
Pages: 445 - 475
Type of Material: Journal Article
Journal/Proceeding Title: American Economic Review
Version: Final published version. Article is made available in OAR by the publisher's permission or policy.

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