NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Cost of Financial Frictions for Life Insurers

Ralph S.J. Koijen, Motohiro Yogo

NBER Working Paper No. 18321
Issued in August 2012
NBER Program(s):   AP   CF   EFG   IO   ME   PE

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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This paper was revised on November 7, 2014

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Document Object Identifier (DOI): 10.3386/w18321

Published: Ralph S. J. Koijen & Motohiro Yogo, 2015. "The Cost of Financial Frictions for Life Insurers," American Economic Review, American Economic Association, vol. 105(1), pages 445-75, January. citation courtesy of

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