The Cost of Financial Frictions for Life Insurers

43 Pages Posted: 18 Aug 2012

See all articles by Ralph S. J. Koijen

Ralph S. J. Koijen

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Motohiro Yogo

Princeton University - Department of Economics; National Bureau of Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: August 2012

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.

Suggested Citation

Koijen, Ralph S. J. and Yogo, Motohiro, The Cost of Financial Frictions for Life Insurers (August 2012). NBER Working Paper No. w18321, Available at SSRN: https://ssrn.com/abstract=2131691

Ralph S. J. Koijen (Contact Author)

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Centre for Economic Policy Research (CEPR) ( email )

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Motohiro Yogo

Princeton University - Department of Economics ( email )

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United States

HOME PAGE: http://sites.google.com/site/motohiroyogo/

National Bureau of Economic Research

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