The Fragility of Market Risk Insurance
Insurers sell retail financial products called variable annuities that package mutual funds with minimum return guarantees over long horizons. Variable annuities accounted for $1.5 trillion or 35% of U.S. life insurer liabilities in 2015. Sales decreased and fees increased after the 2008 financial crisis as the higher valuation of existing liabilities stressed risk-based capital. Insurers also made guarantees less generous or stopped offering guarantees to reduce risk exposure. These supply-side effects persist long after the financial crisis in the low interest rate environment, and variable annuity insurers have suffered especially low stock returns in the COVID-19 crisis. We develop an equilibrium model of insurance markets in which financial frictions and market power are important determinants of pricing, contract characteristics, and the degree of market incompleteness.
Document Object Identifier (DOI): 10.3386/w24182
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