SPDAs and GICs: like money in the bank?
AbstractWe 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).
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.
Volume (Year): (1992)
Issue (Month): Sum ()
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- William M. Gentry & Joseph Milano, 1998. "Taxes and Investment in Annuities," NBER Working Papers 6525, National Bureau of Economic Research, Inc.
- Elijah Brewer, III & William E. Jackson, III, 2002. "Inter-industry contagion and the competitive effects of financial distress announcements: evidence from commercial banks and life insurance companies," Working Paper Series WP-02-23, Federal Reserve Bank of Chicago.
- Elijah Brewer III & Thomas H. Mondschean & Philip Strahan, 1996. "The Role of Monitoring in Reducing the Moral Hazard Problem Associated with Government Guarantees: Evidence from the Life Insurance Industry," Center for Financial Institutions Working Papers 96-15, Wharton School Center for Financial Institutions, University of Pennsylvania.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Janelle Ruswick).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.