Working Paper: NBER ID: w24182
Authors: Ralph Koijen; Motohiro Yogo
Abstract: Variable annuities, which package mutual funds with minimum return guarantees over long horizons, accounted for $1.5 trillion or 35% of U.S. life insurer liabilities in 2015. Sales decreased and fees increased during the global financial crisis, and insurers made guarantees less generous or stopped offering guarantees to reduce risk exposure. These effects persist in the low interest rate environment after the global financial crisis, and variable annuity insurers suffered large equity drawdowns during the COVID-19 crisis. We develop and estimate a model of insurance markets in which financial frictions and market power determine pricing, contract characteristics, and the degree of market completeness.
Keywords: Variable Annuities; Market Risk; Insurance; Financial Frictions; Market Power
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 frictions (G19) | increased fees (H87) |
| increased fees (H87) | decreased attractiveness to investors (G24) |
| increased fees (H87) | decreased sales of variable annuities (G52) |
| financial frictions (G19) | decreased sales of variable annuities (G52) |
| adverse shocks to valuation of existing liabilities (G33) | increased shadow cost of capital (G31) |
| increased shadow cost of capital (G31) | increased fees (H87) |