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The Fragility of Market Risk Insurance

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  • Ralph Koijen
  • Motohiro Yogo

Abstract

Insurers sell retail financial products called variable annuities that package mutual 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 equilibrium 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

  • Ralph Koijen & Motohiro Yogo, 2018. "The Fragility of Market Risk Insurance," NBER Working Papers 24182, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24182
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    References listed on IDEAS

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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, January.
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    9. 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: The Journal of the International Actuarial Association, Cambridge University Press, vol. 41(02), pages 511-545, November.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    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

    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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