Working Paper: NBER ID: w29030
Authors: Ralph S. J. Koijen; Motohiro Yogo
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 their stock returns were especially low 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.
Keywords: No keywords provided
JEL Codes: G22; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shift from defined benefit plans to life insurers and defined contribution plans (G52) | growth of variable annuities (G52) |
| introduction of minimum return guarantees (Y20) | alteration of primary function of life insurers from traditional insurance to financial engineering (G22) |
| variable annuity insurers (G22) | exposure to interest risk and equity risk (G12) |
| maturity mismatch between assets and liabilities (G32) | exposure to interest risk and equity risk (G12) |
| insufficient adjustment of investment strategies (G11) | significant financial instability (F65) |
| regulatory measures (detailed financial disclosures and stress tests) (G28) | monitoring and mitigating risks (H12) |