The Cost of Financial Frictions for Life Insurers

Ralph S. J. Koijen, Motohiro Yogo
2012 Social Science Research Network  
During the financial crisis, life insurers sold long-term policies at deep discounts relative to actuarial value. In December 2008, the average markup was −19 percent for life annuities and −57 percent for universal life insurance. This extraordinary pricing behavior was a consequence of financial frictions and 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 financial
more » ... tions through exogenous variation in required reserves across different types of policies. The shadow cost was $2.32 per dollar of statutory capital for the average insurance company from November
doi:10.2139/ssrn.2031993 fatcat:zkistmp65vckbf3hkz7kudfeei