The Cost of Financial Frictions for Life Insurers
AbstractDuring the financial crisis, life insurers sold long-term policies at deep discounts relative to actuarial value. In December 2008, the average markup was –19 percent for annuities and –57 percent for universal life insurance. This extraordinary pricing behavior was a consequence of financial frictions and 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 financial frictions through exogenous variation in required reserves across different types of policies. The shadow cost was $2.32 per dollar of statutory capital for the average insurance company from November 2008 to February 2009.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18321.
Date of creation: Aug 2012
Date of revision:
Note: AP CF EFG IO ME PE
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Other versions of this item:
- G01 - Financial Economics - - General - - - Financial Crises
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
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- Markus K. Brunnermeier & Thomas M. Eisenbach & Yuliy Sannikov, 2012.
"Macroeconomics with Financial Frictions: A Survey,"
NBER Working Papers
18102, National Bureau of Economic Research, Inc.
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