TY - JOUR
T1 - The evolution from life insurance to financial engineering
AU - Koijen, Ralph S.J.
AU - Yogo, Motohiro
N1 - Funding Information:
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.
Publisher Copyright:
© 2021, International Association for the Study of Insurance Economics.
PY - 2021/9
Y1 - 2021/9
N2 - 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.
AB - 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.
KW - COVID-19 crisis
KW - Global financial crisis
KW - Life insurance industry
KW - Minimum return guarantee
KW - Variable annuity
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U2 - 10.1057/s10713-021-00068-1
DO - 10.1057/s10713-021-00068-1
M3 - Article
C2 - 34429715
AN - SCOPUS:85113238618
SN - 1554-964X
VL - 46
SP - 89
EP - 111
JO - GENEVA Risk and Insurance Review
JF - GENEVA Risk and Insurance Review
IS - 2
ER -