The Cost of Financial Frictions for Life Insurers

Motohiro Yogo and Ralph Koijen

No 83, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: During the financial crisis, life insurers sold long-term insurance policies at firesale prices. In January 2009, the average markup, relative to actuarial value, was $-25$ percent for 30-year term annuities as well as life annuities and $-52$ percent for universal life insurance. This extraordinary pricing behavior was a consequence of financial frictions and statutory reserve regulation that allowed life insurers to record far less than a dollar of reserve per dollar of future insurance liability. Using exogenous variation in required reserves across different types of policies, we identify the shadow cost of financial frictions for life insurers. The shadow cost of raising a dollar of excess reserve was nearly \$5 for the average insurance company in January 2009.

Date: 2012
New Economics Papers: this item is included in nep-ias and nep-ifn
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Citations: View citations in EconPapers (6)

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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 (2014)
Working Paper: The Cost of Financial Frictions for Life Insurers (2012)
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