Discussion paper

DP12560 The Fragility of Market Risk Insurance

Insurers sell retail financial products called variable annuities that package mu- tual funds with minimum return guarantees over long horizons. Variable annuities accounted for $1.5 trillion or 34 percent 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 entirely to reduce risk exposure. We develop an equilib- rium model of insurance markets in which financial frictions and market power are important determinants of pricing, contract characteristics, and the degree of market incompleteness.

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Citation

Koijen, R and M Yogo (2018), ‘DP12560 The Fragility of Market Risk Insurance‘, CEPR Discussion Paper No. 12560. CEPR Press, Paris & London. https://cepr.org/publications/dp12560