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The Fragility of Market Risk Insurance

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  • Koijen, Ralph
  • Yogo, Motohiro

Abstract

Insurers sell retail financial products called variable annuities that package mu- tual funds with minimum return guarantees over long horizons. Variable annuities accounted for $1.5 trillion or 34 percent of U.S. life insurer liabilities in 2015. Sales fell and fees increased after the 2008 financial crisis as the higher valuation of existing liabilities stressed risk-based capital. Insurers also made guarantees less generous or stopped offering guarantees entirely to reduce risk exposure. We develop an equilib- rium model of insurance markets in which financial frictions and market power are important determinants of pricing, contract characteristics, and the degree of market incompleteness.

Suggested Citation

  • Koijen, Ralph & Yogo, Motohiro, 2018. "The Fragility of Market Risk Insurance," CEPR Discussion Papers 12560, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12560
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    1. James M. Poterba (ed.), 2006. "Tax Policy and the Economy, Volume 20," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661985.
    2. Robert McMenamin & Zain Mohey-Deen & Anna L. Paulson & Richard J. Rosen, 2012. "How liquid are U.S. life insurance liabilities?," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Sep.
    3. James Poterba, 2006. "Tax Policy and the Economy, Volume 20," NBER Books, National Bureau of Economic Research, Inc, number pote06-1, June.
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    5. Lee, Soon-Jae & Mayers, David & Smith Jr., Clifford W., 1997. "Guaranty funds and risk-taking Evidence from the insurance industry," Journal of Financial Economics, Elsevier, vol. 44(1), pages 3-24, April.
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    7. Hombert, Johan & Lyonnet, Victor, 2017. "Intergenerational Risk Sharing in Life Insurance: Evidence from France," HEC Research Papers Series 1237, HEC Paris, revised 29 Nov 2017.
    8. Horneff, Wolfram J. & Maurer, Raimond H. & Mitchell, Olivia S. & Stamos, Michael Z., 2009. "Asset allocation and location over the life cycle with investment-linked survival-contingent payouts," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1688-1699, September.
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    11. Kling, Alexander & Ruez, Frederik & Ruß, Jochen, 2011. "The Impact of Stochastic Volatility on Pricing, Hedging, and Hedge Efficiency of Withdrawal Benefit Guarantees in Variable Annuities," ASTIN Bulletin, Cambridge University Press, vol. 41(2), pages 511-545, November.
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    1. Taking the **Sock** out of FSOC
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2018-10-29 12:24:21

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    Cited by:

    1. Mark L. Egan & Shan Ge & Johnny Tang, 2020. "Conflicting Interests and the Effect of Fiduciary Duty — Evidence from Variable Annuities," NBER Working Papers 27577, National Bureau of Economic Research, Inc.
    2. van Bilsen, Servaas & Linders, Daniël, 2019. "Affordable and adequate annuities with stable payouts: Fantasy or reality?," Insurance: Mathematics and Economics, Elsevier, vol. 86(C), pages 19-42.
    3. Hombert, Johan & Möhlmann, Axel & Weiß, Matthias, 2021. "Inter-cohort risk sharing with long-term guarantees: Evidence from German participating contracts," Discussion Papers 10/2021, Deutsche Bundesbank.

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    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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