The Cost of Financial Frictions for Life Insurers
AbstractDuring the financial crisis, life insurers sold long-term insurance policies at firesale prices. In January 2009, the average markup, relative to actuarial value, was $-25$ percent for 30-year term annuities as well as life annuities and $-52$ 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. Using exogenous variation in required reserves across different types of policies, we identify the shadow cost of financial frictions for life insurers. The shadow cost of raising a dollar of excess reserve was nearly \$5 for the average insurance company in January 2009.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 83.
Date of creation: 2012
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-27 (All new papers)
- NEP-IAS-2012-10-27 (Insurance Economics)
- NEP-IFN-2012-10-27 (International Finance)
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