The Cost of Financial Frictions for Life Insurers
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.
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David F. Bradford, 1998. "Introduction to "Economics of Property-Casualty Insurance, The"," NBER Chapters, in: The Economics of Property-Casualty Insurance, pages 1-4 National Bureau of Economic Research, Inc.
- Andrew Ellul & Chotibhak Jotikasthira & Christian T. Lundblad & Yihui Wang, 2012. "Is Historical Cost Accounting a Panacea? Market Stress, Incentive Distortions, and Gains Trading," FMG Discussion Papers dp701, Financial Markets Group.
- Merrill, Craig B. & Nadauld, Taylor & Stulz, Rene M. & Sherlund, Shane M., 2012.
"Did Capital Requirements and Fair Value Accounting Spark Fire Sales in Distressed Mortgage-Backed Securities?,"
Working Paper Series
2012-12, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
- Craig B. Merrill & Taylor D. Nadauld & René M. Stulz & Shane Sherlund, 2012. "Did Capital Requirements and Fair Value Accounting Spark Fire Sales in Distressed Mortgage-Backed Securities?," NBER Working Papers 18270, National Bureau of Economic Research, Inc.
- Markus K. Brunnermeier & Thomas M. Eisenbach & Yuliy Sannikov, 2012.
"Macroeconomics with Financial Frictions: A Survey,"
Levine's Working Paper Archive
786969000000000384, David K. Levine.
- Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September.
- Kenneth A. Froot, 1999. "The Financing of Catastrophe Risk," NBER Books, National Bureau of Economic Research, Inc, number froo99-1, June.
- David F. Bradford, 1998. "The Economics of Property-Casualty Insurance," NBER Books, National Bureau of Economic Research, Inc, number brad98-1, June.
- Jennifer F. Reinganum, 1978.
"A Simple Model of Equilibrium Price Dispersion,"
335, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Koehn, Michael & Santomero, Anthony M, 1980. " Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-44, December.
- Kenneth A. Froot, 1999. "Introduction to "Financing of Catastrophe Risk, The"," NBER Chapters, in: The Financing of Catastrophe Risk, pages 1-22 National Bureau of Economic Research, Inc.
- 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.
When requesting a correction, please mention this item's handle: RePEc:red:sed012:83. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.