Can Risk Be Shared Across Investor Cohorts? Evidence from a Popular Savings Product
Charles A. Dice Center Working Paper No. 2019-17
70 Pages Posted: 16 Jul 2019 Last revised: 11 Sep 2019
Date Written: September 9, 2019
This paper shows how one of the most popular savings products in Europe -- life insurance financial products -- shares market risk across investor cohorts. Insurers smooth returns by varying reserves that offset fluctuations in asset returns. Reserves are passed on between successive investor cohorts, causing redistribution across cohorts. Using regulatory and survey data on the 1.4 trillion euro French market, we estimate this redistribution to be quantitatively large: 1.4% of savings value per year on average, or 0.8% of GDP. These findings challenge a large theoretical literature that assumes inter-cohort risk sharing is impossible. We develop and provide evidence for a model in which the elasticity of investor demand to predictable returns determines the amount of risk sharing that is possible. The evidence is consistent with low elasticity, sustaining inter-cohort risk sharing despite predictable returns. Demand elasticity is higher for investors with a larger investment amount, suggesting that low investor sophistication enables inter-cohort risk sharing.
Keywords: Inter-cohort risk sharing; Life insurers
JEL Classification: G22, G32
Suggested Citation: Suggested Citation