The Cost of Financial Frictions for Life Insurers

By Ralph S. J. Koijen, Motohiro Yogo. 2015

225 citations recorded by the source corpus.

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.

Subfields: Accounting, Demography, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/1cf8beb797a84697a01b1b0a3b30aaa0e3677114

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Citations in the corpus

Reaching for Yield in the Bond Market (2013, unknown): “As documented by Koijen and Yogo (2012), insurance companies overall had been adversely affected during the crisis.”
Is Historical Cost Accounting a Panacea? Market Stress, Incentive Distortions, and Gains Trading (2015, unknown): “14 A third option is to increase the numerator by raising either new equity capital (Berry-Stolzle, Nini, and Wende (2012)) or statutory surplus (Koijen and Yogo (2013)). For life insurers, the latter can be done by selling long-term life policies at prices below break-even but above the required st”
The Limits of Model-based Regulation (2014, unknown): “Complex regulation imposes significant enforcement cost on society and provides regulated entities incentives to find ways around the regulation.12 Recent empirical evidence on the impact of complex regulation in the insurance sector is provided by Koijen and Yogo (2015, 2016).”
Effects of Unconventional Monetary Policy on Financial Institutions (2014, background): “Koijen and Yogo (2013) report that many life insurers sold policies at deep discounts during the period to exploit an accounting loophole and avoid further downgrades.”