The Fragility of Market Risk Insurance

60 Pages Posted: 24 May 2017 Last revised: 11 Mar 2022

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 3 versions of this paper

Date Written: February 23, 2022

Abstract

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

Koijen, Ralph S. J. and Yogo, Motohiro, The Fragility of Market Risk Insurance (February 23, 2022). Journal of Finance, Vol. 77, No. 2, 2022, Becker Friedman Institute for Research in Economics Working Paper No. 2018-9, Available at SSRN: https://ssrn.com/abstract=2972295 or http://dx.doi.org/10.2139/ssrn.2972295

Ralph S. J. Koijen

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/ralph.koijen/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

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Motohiro Yogo (Contact Author)

Princeton University - Department of Economics ( email )

Julis Romo Rabinowitz Building
Princeton, NJ 08544
United States

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

National Bureau of Economic Research

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Cambridge, MA 02138
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