Abstract

http://ssrn.com/abstract=2031993
 
 

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The Cost of Financial Frictions for Life Insurers


Ralph S. J. Koijen


London Business School - Department of Finance; National Bureau of Economic Research (NBER)

Motohiro Yogo


Federal Reserve Bank of Minneapolis

October 22, 2014

American Economic Review, Vol. 105, No. 1, 2015
Chicago Booth Research Paper No. 12-30
Fama-Miller Working Paper

Abstract:     
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.

Number of Pages in PDF File: 42

Keywords: Annuities, Capital regulation, Financial crisis, Leverage, Life insurance

JEL Classification: G01, G22, G28, G32

Accepted Paper Series





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Date posted: March 31, 2012 ; Last revised: November 13, 2014

Suggested Citation

Koijen, Ralph S. J. and Yogo, Motohiro, The Cost of Financial Frictions for Life Insurers (October 22, 2014). American Economic Review, Vol. 105, No. 1, 2015; Chicago Booth Research Paper No. 12-30; Fama-Miller Working Paper. Available at SSRN: http://ssrn.com/abstract=2031993 or http://dx.doi.org/10.2139/ssrn.2031993

Contact Information

Ralph S. J. Koijen
London Business School - Department of Finance ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Motohiro Yogo (Contact Author)
Federal Reserve Bank of Minneapolis ( email )
90 Hennepin Avenue
Minneapolis, MN 55401-1804
United States
HOME PAGE: http://sites.google.com/site/motohiroyogo/
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