Working Paper: CEPR ID: DP12560
Authors: Ralph Koijen; Motohiro Yogo
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.
Keywords: Variable Annuities; Market Risk; Insurance
JEL Codes: G22; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial crisis (G01) | increase in valuation of existing liabilities (G32) |
| increase in valuation of existing liabilities (G32) | stress on risk-based capital requirements for insurers (G22) |
| increase in valuation of existing liabilities (G32) | raise fees on variable annuities (G52) |
| increase in valuation of existing liabilities (G32) | lower rollup rates of minimum return guarantees (G12) |
| raise fees on variable annuities (G52) | decline in sales of variable annuities (G52) |
| lower rollup rates of minimum return guarantees (G12) | decline in sales of variable annuities (G52) |
| increase in reserve valuations (F31) | move variable annuity liabilities off balance sheets through reinsurance (G22) |
| reserve valuation (Q21) | insurer behavior (G52) |
| financial frictions and market power (G19) | pricing of contracts (G13) |
| financial frictions and market power (G19) | characteristics of variable annuities (G52) |