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The Fragility of Market Risk Insurance

Ralph Koijen and Motohiro Yogo

No 24182, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Insurers sell retail financial products called variable annuities that package mutual funds with minimum return guarantees over long horizons. Variable annuities accounted for $1.5 trillion or 35% of U.S. life insurer liabilities in 2015. Sales decreased and fees increased after the 2008 financial crisis as the higher valuation of existing liabilities stressed risk-based capital. Insurers also made guarantees less generous or stopped offering guarantees to reduce risk exposure. These supply-side effects persist long after the financial crisis in the low interest rate environment, and variable annuity insurers have suffered especially low stock returns in the COVID-19 crisis. We develop an equilibrium model of insurance markets in which financial frictions and market power are important determinants of pricing, contract characteristics, and the degree of market incompleteness.

JEL-codes: G22 G32 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-ias and nep-rmg
Note: AP CF IO
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