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The Cost of Financial Frictions for Life Insurers

Author

Listed:
  • Motohiro Yogo

    (Federal Reserve Bank of Minneapolis)

  • Ralph Koijen

    (University of Chicago)

Abstract

During the financial crisis, life insurers sold long-term insurance policies at firesale prices. In January 2009, the average markup, relative to actuarial value, was $-25$ percent for 30-year term annuities as well as life annuities and $-52$ percent for universal life insurance. This extraordinary pricing behavior was a consequence of financial frictions and statutory reserve regulation that allowed life insurers to record far less than a dollar of reserve per dollar of future insurance liability. Using exogenous variation in required reserves across different types of policies, we identify the shadow cost of financial frictions for life insurers. The shadow cost of raising a dollar of excess reserve was nearly \$5 for the average insurance company in January 2009.

Suggested Citation

  • Motohiro Yogo & Ralph Koijen, 2012. "The Cost of Financial Frictions for Life Insurers," 2012 Meeting Papers 83, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:83
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    References listed on IDEAS

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    Cited by:

    1. Maurer, Raimond & Mitchell, Olivia S. & Rogalla, Ralph & Siegelin, Ivonne, 2016. "Accounting and actuarial smoothing of retirement payouts in participating life annuities," Insurance: Mathematics and Economics, Elsevier, vol. 71(C), pages 268-283.
    2. Ralph S.J. Koijen & Stijn Nieuwerburgh & Motohiro Yogo, 2016. "Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice," Journal of Finance, American Finance Association, vol. 71(2), pages 957-1010, April.
    3. Behn, Markus Wilhelm & Haselmann, Rainer & Vig, Vikrant, 2014. "The limits of model-based regulation," IMFS Working Paper Series 82, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    4. Berdin, Elia, 2016. "Interest rate risk, longevity risk and the solvency of life insurers," ICIR Working Paper Series 23/16, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    5. Cassola, Nuno & Koulischer, François, 2016. "The collateral channel of open market operations," Working Paper Series 1906, European Central Bank.
    6. Berdin, Elia & Pancaro, Cosimo & Kok Sørensen, Christoffer, 2016. "A stochastic forward-looking model to assess the profitability and solvency of European insurers," ICIR Working Paper Series 21/16, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    7. Ralph S.J. Koijen & Motohiro Yogo, 2017. "Risk of Life Insurers: Recent Trends and Transmission Mechanisms," NBER Working Papers 23365, National Bureau of Economic Research, Inc.
    8. Ralph S. J. Koijen & Motohiro Yogo, 2016. "Shadow Insurance," Econometrica, Econometric Society, vol. 84, pages 1265-1287, May.
    9. Divya Kirti, 2017. "When Gambling for Resurrection is Too Risky," IMF Working Papers 17/180, International Monetary Fund.
    10. Kirti, Divya, 2018. "When gambling for resurrection is too risky," ESRB Working Paper Series 69, European Systemic Risk Board.
    11. Bo Becker & Marcus Opp, 2013. "Regulatory reform and risk-taking: replacing ratings," NBER Working Papers 19257, National Bureau of Economic Research, Inc.
    12. Bijlsma, Melle & Vermeulen, Robert, 2016. "Insurance companies’ trading behaviour during the European sovereign debt crisis: Flight home or flight to quality?," Journal of Financial Stability, Elsevier, vol. 27(C), pages 137-154.
    13. Vikram Nanda & Wei Wu & Xing Zhou, 2017. "Investment Commonality across Insurance Companies : Fire Sale Risk and Corporate Yield Spreads," Finance and Economics Discussion Series 2017-069, Board of Governors of the Federal Reserve System (U.S.).
    14. Eric Zwick & James Mahon, 2014. "Do financial frictions amplify fiscal policy? Evidence from business investment stimulus," Working Papers 1415, Oxford University Centre for Business Taxation.
    15. Focarelli, Dario, 2017. "Why Insurance Regulation is Crucial for Long-term Investment and Economic Growth," SEP Working Papers 2017/1, LUISS School of European Political Economy.
    16. Sen, Ishita & Humphry, David, 2018. "Capital regulation and product market outcomes," Bank of England working papers 715, Bank of England.
    17. repec:eee:jfinec:v:126:y:2017:i:1:p:1-35 is not listed on IDEAS
    18. Möhlmann, Axel, 2017. "Interest rate risk of life insurers: Evidence from accounting data," Discussion Papers 10/2017, Deutsche Bundesbank.

    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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