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
Date Written: June 1, 2020
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: Suggested Citation