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 fell 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 we highlight the sector’s ongoing financial fragility during the 2020 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.

More Research From These Scholars

BFI Working Paper Jul 2, 2018

Financing the War on Cancer

Ralph Koijen, Stijn Van Nieuwerburgh
Topics:  Health care, Tax & Budget
BFI Working Paper Jul 29, 2019

Inspecting the Mechanism of Quantitative Easing in the Euro Area

Ralph Koijen, François Koulischer, Benoît Nguyen, Motohiro Yogo
Topics:  Financial Markets
BFI Working Paper Oct 1, 2010

On the Timing and Pricing of Dividends

Ralph Koijen, Jules van Binsbergen, Michael Brandt