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The Cost of Financial Frictions for Life Insurers

Ralph Koijen and Motohiro Yogo

No 18321, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G01 G22 G28 (search for similar items in EconPapers)
Date: 2012-08
New Economics Papers: this item is included in nep-ias
Note: AP CF EFG IO ME PE
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Published as Ralph S. J. Koijen & Motohiro Yogo, 2015. "The Cost of Financial Frictions for Life Insurers," American Economic Review, American Economic Association, vol. 105(1), pages 445-75, January.

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Related works:
Journal Article: The Cost of Financial Frictions for Life Insurers (2015) Downloads
Working Paper: The Cost of Financial Frictions for Life Insurers (2014) Downloads
Working Paper: The Cost of Financial Frictions for Life Insurers (2012) Downloads
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