How Do Financial Constraints Affect Product Pricing? Evidence from Weather and Life Insurance Premiums

Shan Ge

Journal of Finance, 2022, vol. 77, issue 1, 449-503

Abstract: I identify the effects of financial constraints on firms' product pricing decisions, using insurance groups containing both life and property & casualty (P&C) divisions. Following P&C divisions' losses, life divisions change prices in a manner that can generate more immediate financial resources: premiums fall (rise) for life policies that immediately increase (decrease) insurers' financial resources. Premiums change more in groups that are more constrained. Life divisions increase transfers to P&C divisions, suggesting P&C divisions' shocks are transmitted to life divisions. Results hold when instrumenting for P&C divisions' losses with exposure to unusual weather damages, implying that the effects are causal.

Date: 2022
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https://doi.org/10.1111/jofi.13093

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