The Fragility of Market Risk Insurance

52 Pages Posted: 24 May 2017 Last revised: 9 Apr 2020

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: April 8, 2020

Abstract

Insurers sell retail financial products called variable annuities that package mutual funds with minimum return guarantees over long horizons. Variable annuities accounted for $1.5 trillion or 35% of U.S. life insurer liabilities in 2015. Sales fell and fees increased after the 2008 financial crisis as the higher valuation of existing liabilities stressed risk-based capital. Insurers also made guarantees less generous or stopped offering guarantees to reduce risk exposure. These supply-side effects persist long after the financial crisis in the low interest rate environment, and we highlight the sector's ongoing financial fragility during the 2020 COVID-19 crisis. We develop an equilibrium model of insurance markets in which financial frictions and market power are important determinants of pricing, contract characteristics, and the degree of market incompleteness.

Keywords: Financial crisis, Life insurance industry, Minimum return guarantees, Risk-based capital regulation, Variable annuities

JEL Classification: G22, G32

Suggested Citation

Koijen, Ralph S. J. and Yogo, Motohiro, The Fragility of Market Risk Insurance (April 8, 2020). 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 )

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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

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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