Can Risk Be Shared Across Investor Cohorts? Evidence from a Popular Savings Product

Johan Hombert and Victor Lyonnet

No 14029, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper shows how one of the most popular savings products in Europe -- life insurance financial products -- shares market risk across investor cohorts. Insurers smooth returns by varying reserves that offset fluctuations in asset returns. Reserves are passed on between successive investor cohorts, causing redistribution across cohorts. Using regulatory and survey data on the 1.4 trillion euro French market, we estimate this redistribution to be quantitatively large: 1.4% of savings value per year on average, or 0.8% of GDP. These findings challenge a large theoretical literature that assumes inter-cohort risk sharing is impossible. We develop and provide evidence for a model in which the elasticity of investor demand to predictable returns determines the amount of risk sharing that is possible. The evidence is consistent with low elasticity, sustaining inter-cohort risk sharing despite predictable returns. Demand elasticity is higher for investors with a larger investment amount, suggesting that low investor sophistication enables inter-cohort risk sharing.

Keywords: Inter-cohort risk sharing; Life insurers (search for similar items in EconPapers)
JEL-codes: G22 G32 (search for similar items in EconPapers)
Date: 2019-09
New Economics Papers: this item is included in nep-eur and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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