SPDAs and GICs: like money in the bank?

Richard M. Todd and Neil Wallace ()

Quarterly Review, 1992, vol. 16, issue Sum, 2-17

Abstract: We argue that changes in the life insurance industry have created a nontrivial moral hazard. We document the industry's shift from sales of life insurance to sales of mainly rate-of-return oriented investments like single premium deferred annuities (SPDAs) and guaranteed investment contracts (GICs). We describe the system of explicit and implicit guarantees that state governments and the industry provide to SPDA and GIC investors. We argue that these guarantees create moral hazards that have contributed to insurance company failures and misallocation of resources. We summarize reformers' proposals to enhance both the explicit guarantees and the regulation of insurance companies and argue that maintaining the degree of regulatory tightness required for such proposals to succeed will be difficult. We suggest an alternative: eliminate guarantees of SPDAs, GICs, and similar products (and possibly promote full disclosure practices and earmarked investments like variable annuities).

Keywords: Insurance; industry (search for similar items in EconPapers)
Date: 1992
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://minneapolisfed.org/research/qr/qr1631.pdf (application/pdf)
http://minneapolisfed.org/research/qr/qr1631.html (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmqr:y:1992:i:sum:p:2-17:n:v.16no.3

Access Statistics for this article

More articles in Quarterly Review from Federal Reserve Bank of Minneapolis Contact information at EDIRC.
Bibliographic data for series maintained by Kate Hansel ().