Internal Capital Markets and Product Pricing: Evidence from Weather and Life Insurance Premiums
Charles A. Dice Working Paper No. 2017-27
62 Pages Posted: 10 Nov 2017 Last revised: 21 Jan 2019
Date Written: January 2019
I find that shocks to divisions’ financial conditions affect other divisions’ product pricing using insurance business groups that have both life and P&C (property & casualty) divisions. Following P&C losses, life divisions increase financial transfers to P&C divisions and change prices in a manner that can generate more immediate financial resources: Premiums fall for life policies that initially increase insurers’ financial resources, and rise for life policies that initially decrease insurers’ financial resources. Results hold when using unusual weather damages to instrument for P&C losses, implying shocks to divisions’ financial conditions affect other divisions’ product pricing through internal capital markets.
Keywords: Internal Capital Markets, Product Pricing, Insurance, Financial Constraints
JEL Classification: G22, G28, G30
Suggested Citation: Suggested Citation