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How Do Financial Constraints Affect Product Pricing? Evidence from Weather and Life Insurance Premiums

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  • SHAN GE

Abstract

I identify the effects of financial constraints on firms' product pricing decisions, using insurance groups containing both life and property & casualty (P&C) divisions. Following P&C divisions' losses, life divisions change prices in a manner that can generate more immediate financial resources: premiums fall (rise) for life policies that immediately increase (decrease) insurers' financial resources. Premiums change more in groups that are more constrained. Life divisions increase transfers to P&C divisions, suggesting P&C divisions' shocks are transmitted to life divisions. Results hold when instrumenting for P&C divisions' losses with exposure to unusual weather damages, implying that the effects are causal.

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  • Shan Ge, 2022. "How Do Financial Constraints Affect Product Pricing? Evidence from Weather and Life Insurance Premiums," Journal of Finance, American Finance Association, vol. 77(1), pages 449-503, February.
    • Handle: RePEc:bla:jfinan:v:77:y:2022:i:1:p:449-503
    DOI: 10.1111/jofi.13093
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