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The Cost of Financial Frictions for Life Insurers

Author

Listed:
  • Motohiro Yogo

    (Federal Reserve Bank of Minneapolis)

  • Ralph Koijen

    (University of Chicago)

Abstract
During the financial crisis, life insurers sold long-term insurance policies at firesale prices. In January 2009, the average markup, relative to actuarial value, was $-25$ percent for 30-year term annuities as well as life annuities and $-52$ 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. Using exogenous variation in required reserves across different types of policies, we identify the shadow cost of financial frictions for life insurers. The shadow cost of raising a dollar of excess reserve was nearly \$5 for the average insurance company in January 2009.

Suggested Citation

  • Motohiro Yogo & Ralph Koijen, 2012. "The Cost of Financial Frictions for Life Insurers," 2012 Meeting Papers 83, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:83
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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