The Evolution from Life Insurance to Financial Engineering

27 Pages Posted: 22 Jul 2021

See all articles by Ralph J. Koijen

Ralph J. Koijen

affiliation not provided to SSRN

Motohiro Yogo

Princeton University - Department of Economics; National Bureau of Economic Research

Date Written: July 19, 2021

Abstract

Since the mid-1980s, the share of household net worth intermediated by US financial institutions has shifted from defined benefit plans to life insurers and defined contribution plans. Life insurers have primarily grown through variable annuities, which are mutual funds with longevity insurance, a potential tax advantage, and minimum return guarantees. The minimum return guarantees change the primary function of life insurers from traditional insurance to financial engineering. Variable annuity insurers are exposed to interest and equity risk mismatch and suffered especially low stock returns during the COVID-19 crisis. We consider regulatory changes, such as more detailed financial disclosure and standardized stress tests, to monitor potential risk mismatch and to ensure stability of the insurance sector.

JEL Classification: G22,G32

Suggested Citation

J. Koijen, Ralph and Yogo, Motohiro, The Evolution from Life Insurance to Financial Engineering (July 19, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-85, Available at SSRN: https://ssrn.com/abstract=3890299 or http://dx.doi.org/10.2139/ssrn.3890299

Ralph J. Koijen (Contact Author)

affiliation not provided to SSRN

No Address Available

Motohiro Yogo

Princeton University - Department of Economics ( email )

Julis Romo Rabinowitz Building
Princeton, NJ 08544
United States

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

National Bureau of Economic Research

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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