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Showing results 1 to 10 of approximately 13.
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Working Paper
Measuring Interest Rate Risk in the Life Insurance Sector: The U.S. and the U.K.
We use a two factor model of life insurer stock returns to measure interest rate risk at U.S. and U.K. insurers. Our estimates show that interest rate risk among U.S. life insurers increased as interest rates decreased to historically low levels in recent years. For life insurers in the U.K., in contrast, interest rate risk remained low during this time, roughly unchanged from what it was in the period prior to the financial crisis when long-term interest rates were in their usual historical ranges. We attribute these differences to the heavier use of products that combine guarantees with ...
Working Paper
What's Wrong with Annuity Markets?
We show that the supply of life annuities in the U.S. is constrained by interest rate risk. We identify this effect using annuity prices offered by U.S. life insurers from 1989 to 2019 and exogenous variations in contract-level regulatory capital requirements. The cost of interest rate risk management accounts for at least half of the average life annuity markups or eight percentage points. The contribution of interest rate risk to annuity markups sharply increased after the great financial crisis, suggesting new retirees' opportunities to transfer their longevity risk are unlikely to improve ...
Newsletter
Rules and Discretion in Life Insurance Regulation
In this Chicago Fed Letter, we illustrate how regulators have used rule-based and principle-based approaches to set the minimum level of reserves and capital for insurers. We use examples to show the trend toward more principle-based regulation.
Working Paper
Human Capital Risk, Contract Enforcement, and the Macroeconomy
We use data from the Survey of Consumer Finance and Survey of Income Program Participation to show that young households with children are under-insured against the risk that an adult member of the household dies. We develop a tractable macroeconomic model with human capital risk, age-dependent returns to human capital investment, and endogenous borrowing constraints due to the limited pledgeability of human capital (limited contract enforcement). We show analytically that, consistent with the life insurance data, in equilibrium young households are borrowing constrained and under-insured ...
Report
Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice
We develop a pair of risk measures, health and mortality delta, for the universe of life and health insurance products. A life-cycle model of insurance choice simplifies to replicating the optimal health and mortality delta through a portfolio of insurance products. We estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance, annuities including private pensions, and long-term care insurance in the Health and Retirement Study. For the median household aged 51 to 57, the lifetime welfare cost of market incompleteness and ...
Journal Article
Private Efforts for Affordable Mortgage Lending Before Fannie and Freddie
Prior to government interventions in the U.S. mortgage market during the 1930s, private institutions arose to improve the efficiency of the market and produce more affordable mortgage products. These institutions included mortgage companies that made significant use of mortgage securitization, building and loan associations, and life insurance company mortgage operations. These developments allowed for the creation of geographically more diversified mortgage portfolios while working to address the difficulties of maintaining effective oversight of local lending agents. They may be suggestive ...
Discussion Paper
Growing Risk in the Insurance Sector
Developing risk in the life insurance industry requires prudent policy response to prevent broader economic damage.
Report
The Cost of Financial Frictions for Life Insurers
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 ...
Journal Article
What Explains the Decline in Life Insurance Ownership?
Life insurance ownership has declined markedly over the past 30 years, continuing a trend that began as early as 1960. In 1989, 77 percent of households owned life insurance (see figure 1). By 2013, that share had fallen to 60 percent. This article analyzes factors that might have contributed to the decline in life insurance ownership from 1989 to 2013. The focus of our analysis is on two broad sources of potential change in the demand for life insurance: changes in the socioeconomic and demographic characteristics of the population and changes in how those same characteristics are associated ...
Newsletter
Reinvesting After the Crisis: Changes in the Fixed-Income Portfolios of Life Insurers
The years following the Great Recession presented a unique set of challenges for life insurers even as the U.S. economic recovery began to gain momentum. Between the financial crisis in 2008 and the end of 2016, life insurers? policyholder liabilities grew 25%, from $2.6 trillion to $3.2 trillion, while their preferred investment habitat, the fixed-income securities market (excluding Treasury securities), grew by only 3%, from $22.0 trillion to $22.1 trillion.