How Do Financial Constraints Affect Product Pricing? Evidence from Weather and Life Insurance Premiums

108 Pages Posted: 10 Nov 2017 Last revised: 22 Jan 2021

See all articles by Shan Ge

Shan Ge

New York University, Stern School of Business

Date Written: June 1, 2020

Abstract

I identify the effects of financial constraints on firms’ product pricing decisions, using insurance groups containing both life and property & casualty (P&C) divisions. Following P&C divisions’ losses, life divisions change prices in a manner that can generate more immediate financial resources: premiums fall (rise) for life policies that immediately increase (decrease) insurers’ financial resources. Premiums change more in groups that are more constrained. Life divisions increase transfers to P&C divisions, suggesting P&C divisions’ shocks are transmitted to life divisions. Results hold when instrumenting for P&C divisions' losses with exposure to unusual weather damages, implying that the effects are causal.

Keywords: Product Pricing, Financial Constraints, Internal Capital Markets, Insurance

JEL Classification: G22, G28, G30

Suggested Citation

Ge, Shan, How Do Financial Constraints Affect Product Pricing? Evidence from Weather and Life Insurance Premiums (June 1, 2020). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3067609 or http://dx.doi.org/10.2139/ssrn.3067609

Shan Ge (Contact Author)

New York University, Stern School of Business ( email )

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