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Can Risk Be Shared Across Investor Cohorts? Evidence from a Popular Savings Product

Author

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  • Hombert, Johan

    (HEC Paris - Finance Department)

  • Lyonnet, Victor

    (Ohio State University (OSU))

Abstract

This paper shows how one of the most popular savings products in Europe--life insurance financial products--shares market risk across investor cohorts. Insurers smooth returns by varying reserves that offset fluctuations in asset returns. Reserves are passed on between successive investor cohorts, causing redistribution across cohorts. Using regulatory and survey data on the 1.4 trillion euro French market, we estimate this redistribution to be quantitatively large: 1.4% of savings value per year on average, or 0.8% of GDP. These findings challenge a large theoretical literature that assumes inter-cohort risk sharing is impossible. We develop and provide evidence for a model in which the elasticity of investor demand to predictable returns determines the amount of risk sharing that is possible. The evidence is consistent with low elasticity, sustaining inter-cohort risk sharing despite predictable returns. Demand elasticity is higher for investors with a larger investment amount, suggesting that low investor sophistication enables inter-cohort risk sharing.

Suggested Citation

  • Hombert, Johan & Lyonnet, Victor, 2019. "Can Risk Be Shared Across Investor Cohorts? Evidence from a Popular Savings Product," Working Paper Series 2019-17, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2019-17
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    Cited by:

    1. Kubitza, Christian & Grochola, Nicolaus & Gründl, Helmut, 2021. "Life insurance convexity," ICIR Working Paper Series 42/21, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    2. 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.
    3. Axel Möhlmann, 2021. "Interest rate risk of life insurers: Evidence from accounting data," Financial Management, Financial Management Association International, vol. 50(2), pages 587-612, June.

    More about this item

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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