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Market discipline and policy loans

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  • Chiang, Chia-Chun
  • Niehaus, Greg

Abstract

We examine the conditions under which life insurer customers can use a policy loan to protect the unguaranteed cash value in their life insurance policies and annuity contracts from insurer insolvency, and thereby provide market discipline for life insurers. Consistent with policyholders using policy loans to protect their cash value, our empirical evidence indicates that insurers’ policy loan growth rates are negatively associated with measures of insurers’ financial strength, specifically their capital ratios. We also find evidence that the negative association is stronger for insurers that focus on selling annuities.

Suggested Citation

  • Chiang, Chia-Chun & Niehaus, Greg, 2024. "Market discipline and policy loans," Journal of Banking & Finance, Elsevier, vol. 159(C).
    • Handle: RePEc:eee:jbfina:v:159:y:2024:i:c:s0378426623002716
    DOI: 10.1016/j.jbankfin.2023.107076
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    Cited by:

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    2. Hu, Guangyu & Shen, Yu, 2025. "The role of depositors’ expectations in bank risk: a dual-channel perspective," Finance Research Letters, Elsevier, vol. 84(C).

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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