Open AccessThe Cost of Financial Frictions for Life Insurers
Author(s) -
Ralph S. J. Koijen,
Motohiro Yogo
Publication year - 2015
Publication title -
american economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.936
H-Index - 297
eISSN - 1944-7981
pISSN - 0002-8282
DOI - 10.1257/aer.20121036
Subject(s) - liberian dollar , economics , life insurance , financial crisis , libor , capital (architecture) , liability , statutory law , liability insurance , deposit insurance , shadow (psychology) , monetary economics , interest rate , finance , actuarial science , macroeconomics , history , psychology , archaeology , political science , law , psychotherapist
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.
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