The Cost of Financial Frictions for Life Insurers
Ralph S. J. Koijen
London Business School - Department of Finance; National Bureau of Economic Research (NBER)
Federal Reserve Bank of Minneapolis
April 15, 2013
Chicago Booth Research Paper No. 12-30
Fama-Miller Working Paper
During the financial crisis, life insurers sold long-term policies at deep discounts relative to actuarial value. In December 2008, the average markup was −19 percent for annuities and −57 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. We identify the shadow cost of financial frictions through exogenous variation in required reserves across different types of policies. The shadow cost was $2.32 per dollar of statutory capital for the average insurance company from November 2008 to February 2009.
Number of Pages in PDF File: 50
Keywords: Annuities, Financial crisis, Leverage, Life insurance, Statutory reserve regulation
JEL Classification: G01, G22, G28working papers series
Date posted: March 31, 2012 ; Last revised: April 16, 2013
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