The Cost of Financial Frictions for Life Insurers

Ralph S. J. Koijen and Motohiro Yogo

No 500, Staff Report from Federal Reserve Bank of Minneapolis

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: Capital regulation; Annuities; Leverage; Life insurance; Financial crisis (search for similar items in EconPapers)
JEL-codes: G01 G22 G28 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2014-06-11
New Economics Papers: this item is included in nep-ias, nep-ifn and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: The Cost of Financial Frictions for Life Insurers (2015)
Working Paper: The Cost of Financial Frictions for Life Insurers (2012)
Working Paper: The Cost of Financial Frictions for Life Insurers (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:500

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