nep-ifn New Economics Papers
on International Finance
Issue of 2014‒07‒21
one paper chosen by
Vimal Balasubramaniam
University of Oxford

  1. The Cost of Financial Frictions for Life Insurers By Koijen, Ralph S.J.; Yogo, Motohiro

  1. By: Koijen, Ralph S.J. (London Business School); Yogo, Motohiro (Federal Reserve Bank of Minneapolis)
    Abstract: During the financial crisis, life insurers sold long-term policies at deep discounts relative to actuarial value. The average markup was as low as −19 percent for annuities and −57 percent for life insurance. This extraordinary pricing behavior was due to financial and product market frictions, interacting with statutory reserve regulation that allowed life insurers to record far less than a dollar of reserve per dollar of future insurance liability. We identify the shadow cost of capital through exogenous variation in required reserves across different types of policies. The shadow cost was $0.96 per dollar of statutory capital for the average company in November 2008.
    Keywords: Annuities; Capital regulation; Financial crisis; Leverage; Life insurance
    JEL: G01 G22 G28
    Date: 2014–06–11

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