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Aspects of Insurance, Intermediation and Finance*

Author

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  • Michael J. Brennan

    ([1] Irwin and Gohlyne Hearsh Professor of Finance, University of California, Los Angeles, 405 Hilgard Ave., 90024, Los Angeles, CA [2] Professor of Finance, London Business School, London, England.)

Abstract

This paper is concerned with the role of the insurance company as a financial intermediary which offers securities to uninformed retail investors. The search costs of retail investors cause the demand for the securities offered by intermediaries to be inelastic, making possible an intermediary spread, the difference between the returns on primary securities and the rates offered on the secondary securities sold by intermediaries. It is argued that the intermediary spread is economically significant, and a simple model of its determination is offered: the spread is shown to be an increasing function of interest rates. The bonus policy of life insurance companies is analyzed and is shown to be inefficient under simple assumptions about asset returns. The Geneva Papers on Risk and Insurance Theory (1993) 18, 7–30. doi:10.1007/BF01125821

Suggested Citation

  • Michael J. Brennan, 1993. "Aspects of Insurance, Intermediation and Finance*," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 18(1), pages 7-30, June.
    • Handle: RePEc:pal:genrir:v:18:y:1993:i:1:p:7-30
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    Citations

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    Cited by:

    1. Johanna Scheller & Jacques Pézier, 2008. "Optimal Investment Strategies and Performance Sharing Rules for Pension Schemes with Minimum Guarantee," ICMA Centre Discussion Papers in Finance icma-dp2008-09, Henley Business School, University of Reading, revised Oct 2009.
    2. Grosen, Anders & Lochte Jorgensen, Peter, 2000. "Fair valuation of life insurance liabilities: The impact of interest rate guarantees, surrender options, and bonus policies," Insurance: Mathematics and Economics, Elsevier, vol. 26(1), pages 37-57, February.
    3. Trond M Døskeland & Helge A Nordahl, 2008. "Intergenerational Effects of Guaranteed Pension Contracts," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 33(1), pages 19-46, June.
    4. Døskeland, Trond M. & Nordahl, Helge A., 2008. "Optimal pension insurance design," Journal of Banking & Finance, Elsevier, vol. 32(3), pages 382-392, March.
    5. Boyle, Phelim & Tian, Weidong, 2008. "The design of equity-indexed annuities," Insurance: Mathematics and Economics, Elsevier, vol. 43(3), pages 303-315, December.
    6. Guillen, Montserrat & Jorgensen, Peter Lochte & Nielsen, Jens Perch, 2006. "Return smoothing mechanisms in life and pension insurance: Path-dependent contingent claims," Insurance: Mathematics and Economics, Elsevier, vol. 38(2), pages 229-252, April.
    7. Lindset, Snorre, 2003. "Pricing of multi-period rate of return guarantees," Insurance: Mathematics and Economics, Elsevier, vol. 33(3), pages 629-644, December.

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