Insurers’ Investments and Insurance Prices

85 Pages Posted: 26 Mar 2023 Last revised: 21 May 2024

See all articles by Benjamin Knox

Benjamin Knox

Board of Governors of the Federal Reserve System

Jakob Ahm Sørensen

Bocconi University - Department of Finance

Date Written: May 20, 2024

Abstract

We develop a theory that connects insurance prices, insurance companies’ investment behavior, and equilibrium asset prices. Consistent with the model's key predictions, we show empirically that (1) insurers with more stable insurance funding take more investment risk and, therefore, earn higher average investment returns; (2) insurers set lower prices on policies when expected investment returns are higher, both in the cross-section of insurance companies and in the time series. To help control for alternative explanations, we show our results hold both for life insurance companies and, using a novel approach, for property and casualty insurance companies. Our findings show that insurers' asset allocation and product pricing decisions are more connected than previously thought.

Keywords: Insurance pricing, portfolio choice, corporate bonds

JEL Classification: G22, G11, G12

Suggested Citation

Knox, Benjamin and Sørensen, Jakob Ahm, Insurers’ Investments and Insurance Prices (May 20, 2024). Available at SSRN: https://ssrn.com/abstract=4394474 or http://dx.doi.org/10.2139/ssrn.4394474

Benjamin Knox (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jakob Ahm Sørensen

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

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