Working Paper: NBER ID: w18321
Authors: Ralph S.J. Koijen; Motohiro Yogo
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: No keywords provided
JEL Codes: G01; G22; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial frictions (G19) | pricing behavior of life insurers (G52) |
| product market frictions (D49) | pricing behavior of life insurers (G52) |
| statutory reserve regulation (G28) | pricing behavior of life insurers (G52) |
| shadow cost of capital (G31) | pricing behavior of life insurers (G52) |
| balance sheet shocks (F65) | pricing behavior of life insurers (G52) |
| higher shadow costs (O22) | more policies sold (G52) |
| pricing behavior (D40) | downward shift in supply curve (J20) |
| balance sheet shocks (F65) | supply curve shift (D49) |