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The Cost of Financial Frictions for Life Insurers

  • Ralph S.J. Koijen
  • Motohiro Yogo

During the financial crisis, life insurers sold long-term policies at deep discounts relative to actuarial value. The average markup was as low as –19 percent for annuities and –57 percent for life insurance. This extraordinary pricing behavior was due to financial and product market frictions, interacting with statutory reserve regulation that allowed life insurers to record far less than a dollar of reserve per dollar of future insurance liability. We identify the shadow cost of capital through exogenous variation in required reserves across different types of policies. The shadow cost was $0.96 per dollar of statutory capital for the average company in November 2008.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18321.

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Date of creation: Aug 2012
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Publication status: published as Ralph S. J. Koijen & Motohiro Yogo, 2015. "The Cost of Financial Frictions for Life Insurers," American Economic Review, American Economic Association, vol. 105(1), pages 445-75, January.
Handle: RePEc:nbr:nberwo:18321
Note: AP CF EFG IO ME PE
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  8. Gron, Anne, 1994. "Evidence of Capacity Constraints in Insurance Markets," Journal of Law and Economics, University of Chicago Press, vol. 37(2), pages 349-77, October.
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