The Evolution from Life Insurance to Financial Engineering
Since the mid-1980s, the share of household net worth intermediated by US ﬁnancial institutions has shifted from deﬁned beneﬁt plans to life insurers and deﬁned contribution plans. Life insurers have primarily grown through variable annuities, which are mutual funds with longevity insurance, a potential tax advantage, and minimum return guarantees. The minimum return guarantees change the primary function of life insurers from traditional insurance to ﬁnancial engineering. Variable annuity insurers are exposed to interest and equity risk mismatch and their stock returns were especially low during the COVID-19 crisis. We consider regulatory changes, such as more detailed ﬁnancial disclosure and standardized stress tests, to monitor potential risk mismatch and to ensure stability of the insurance sector.
This invited paper was prepared for the Geneva Risk Economics Lecture at the 47th Seminar of European Group of Risk and Insurance Economists. We thank Alexander Mürmann, Gregory Niehaus, and Casey Rothschild for comments. A.M. Best Company, Morningstar, and the NAIC own the copyright to their respective data, which we use with permission under their license agreements with Princeton University. This paper is based upon work supported by the National Science Foundation under grant 1727049. Koijen acknowledges ﬁnancial support from the Center for Research in Security Prices at the University of Chicago and the Fama Research Fund at the University of Chicago Booth School of Business. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Ralph S. J. Koijen & Motohiro Yogo, 2021. "The evolution from life insurance to financial engineering," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 46(2), pages 89-111, September. citation courtesy of