The Fragility of Market Risk Insurance
60 Pages Posted: 24 May 2017 Last revised: 11 Mar 2022
Date Written: February 23, 2022
Variable annuities, which package mutual funds with minimum return guarantees over long horizons, accounted for $1.5 trillion or 35% of U.S. life insurer liabilities in 2015. Sales decreased and fees increased during the global financial crisis, and insurers made guarantees less generous or stopped offering guarantees to reduce risk exposure. These effects persist in the low interest rate environment after the global financial crisis, and variable annuity insurers suffered large equity drawdowns during the COVID-19 crisis. We develop and estimate a model of insurance markets in which financial frictions and market power determine pricing, contract characteristics, and the degree of market completeness.
Keywords: COVID-19 crisis, Global financial crisis, Life insurance industry, Minimum return guarantees, Risk-based capital regulation, Variable annuity
JEL Classification: G22, G32
Suggested Citation: Suggested Citation