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The Fragility of Market Risk Insurance

Author

Listed:
  • Ralph Koijen

    (University of Chicago)

  • Motohiro Yogo

    (Princeton University)

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.

Suggested Citation

  • Ralph Koijen & Motohiro Yogo, 2022. "The Fragility of Market Risk Insurance," Working Papers 2022-3, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2022-3
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    File URL: https://www.nber.org/system/files/working_papers/w24182/w24182.pdf
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    References listed on IDEAS

    as
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Taking the **Sock** out of FSOC
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2018-10-29 12:24:21

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    3. Kubitza, Christian & Grochola, Nicolaus & Gründl, Helmut, 2021. "Life insurance convexity," ICIR Working Paper Series 42/21, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    4. Thorsten Moenig, 2022. "It's RILA time: An introduction to registered index‐linked annuities," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(2), pages 339-369, June.
    5. Hombert, Johan & Möhlmann, Axel & Weiß, Matthias, 2021. "Inter-cohort risk sharing with long-term guarantees: Evidence from German participating contracts," Discussion Papers 10/2021, Deutsche Bundesbank.
    6. Stéphane Verani & Pei Cheng Yu, 2024. "What’s Wrong with Annuity Markets?," Journal of the European Economic Association, European Economic Association, vol. 22(4), pages 1981-2024.
    7. Zach Y. Brown & Mark L. Egan & Jihye Jeon & Chuqing Jin & Alex A. Wu, 2023. "Why Do Index Funds Have Market Power? Quantifying Frictions in the Index Fund Market," NBER Working Papers 31778, National Bureau of Economic Research, Inc.
    8. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    9. Bingzheng Chen & Zongxia Liang & Shunzhi Pang, 2024. "Dynamic Investment-Driven Insurance Pricing: Equilibrium Analysis and Welfare Implication," Papers 2410.18432, arXiv.org.
    10. Bo Becker & Marcus M Opp & Farzad Saidi, 2022. "Regulatory Forbearance in the U.S. Insurance Industry: The Effects of Removing Capital Requirements for an Asset Class," The Review of Financial Studies, Society for Financial Studies, vol. 35(12), pages 5438-5482.
    11. Janet Gao & Shan Ge & Lawrence D. W. Schmidt & Cristina Tello-Trillo, 2023. "How Do Health Insurance Costs Affect Firm Labor Composition and Technology Investment?," Working Papers 23-47, Center for Economic Studies, U.S. Census Bureau.
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    15. Bacinello, Anna Rita & Maggistro, Rosario & Zoccolan, Ivan, 2024. "Risk-neutral valuation of GLWB riders in variable annuities," Insurance: Mathematics and Economics, Elsevier, vol. 114(C), pages 1-14.
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    More about this item

    Keywords

    Insurance; Financial Crisis; Risk;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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