The Fragility of Market Risk Insurance

47 Pages Posted: 8 Jan 2018

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: January 2018

Abstract

Insurers sell retail financial products called variable annuities that package mu- tual funds with minimum return guarantees over long horizons. Variable annuities accounted for $1.5 trillion or 34 percent 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 entirely to reduce risk exposure. We develop an equilib- rium model of insurance markets in which financial frictions and market power are important determinants of pricing, contract characteristics, and the degree of market incompleteness.

JEL Classification: G22, G32

Suggested Citation

Koijen, Ralph S. J. and Yogo, Motohiro, The Fragility of Market Risk Insurance (January 2018). CEPR Discussion Paper No. DP12560, Available at SSRN: https://ssrn.com/abstract=3098156

Ralph S. J. Koijen (Contact Author)

University of Chicago - Booth School of Business ( email )

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

Centre for Economic Policy Research (CEPR) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Motohiro Yogo

Princeton University - Department of Economics ( email )

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United States

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

National Bureau of Economic Research

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