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How Much Risk Do Variable Annuity Guarantees Pose to Life Insurers?
Over the past two decades, guarantees that protect variable annuities? balances when their underlying investments perform poorly have become quite popular. Collectively, these guarantees can pose a sizable risk to life insurers. This article explores the different types of variable annuity guarantees, the extent of the risk they pose to insurers, and the practices used by insurers to mitigate against such risk.
Journal Article
Wildfires and Real Estate Values in California
Wildfires have been a concern in California for decades. The intensity of these events has increased recently, with particularly large and destructive fire seasons between 2018 and 2021. Analysis shows that distance from high fire-risk zones had little impact on residential housing values in the past. However, that has changed since the late 2010s, coinciding with more extensive fire damage to land and structures across the state. Insurance availability appears to help little in preserving home values in areas that are considered more at risk.
Working Paper
Dissecting Idiosyncratic Earnings Risk
This paper examines whether nonlinear and non-Gaussian features of earnings dynamics are caused by hours or hourly wages. Our findings from the Norwegian administrative and survey data are as follows: (i) Nonlinear mean reversion in earnings is driven by the dynamics of hours worked rather than wages since wage dynamics are close to linear, while hours dynamics are nonlinear—negative changes to hours are transitory, while positive changes are persistent. (ii) Large earnings changes are driven equally by hours and wages, whereas small changes are associated mainly with wage shocks. (iii) ...
Working Paper
Equilibrium with Mutual Organizations in Adverse Selection Economies
An equilibrium concept in the Debreu (1954) theory-of-value tradition is developed for a class of adverse selection economies and applied to the Spence signaling and Rothschild-Stiglitz (1976) adverse selection environments. The equilibrium exists and is optimal. Further, all equilibria have the same individual type utility vector. The economies are large with a finite number of types that maximize expected utility on an underlying commodity space. An implication of the analysis is that the invisible hand works for this class of adverse selection economies.
Working Paper
Capital Constraints and Risk Shifting: An Instrumental Approach
When firms approach distress, whether they engage in asset substitution (risk shifting) or rebuild equity (risk management) may depend on their access to capital markets. The property-casualty insurance industry has two features that make it ideal for testing this hypothesis: (1) the main losses for insurers are exogenous events like hurricanes that provide a strong instrument for financial distress; and (2) many insurers are organized as mutual companies, which cannot issue stock. Consistent with the importance of capital constraints, stock companies issue new equity following a negative ...
Working Paper
Insurance and Inequality with Persistent Private Information
We study the implications of optimal insurance provision for long-run welfare and inequality in economies with persistent private information. A principal insures an agent whose private type follows an ergodic, finite-state Markov chain. The optimal contract always induces immiseration: the agent’s consumption and utility decrease without bound. Under positive serial correlation, it also backloads high-powered incentives: the sensitivity of the agent’s utility with respect to his reports increases without bound. These results extend—and help elucidate the limits of—the hallmark ...
Briefing
The Economic and Human Impacts of Hurricanes
Hurricane Helene brought large destruction to parts of the Fifth Federal Reserve District, most notably western North Carolina.1 Helene was the deadliest hurricane to hit the mainland U.S. since Hurricane Katrina in 2005, and Helene's impact on both metro and rural areas was devastating. Then, less than a week later, Hurricane Milton made landfall in Florida as a Category 3 storm.Such powerful storms not only have immediate effects but can have lasting ones as well. There are recent advancements in the research literature that help us better understand what more or stronger hurricanes might ...
A Closer Look at the Correlation Between Google Trends and Initial Unemployment Insurance Claims
Since the onset of the pandemic, there has been growing interest in tracking labor market activity with “big data” sources like Google Trends.1 Just as an example, one can track how the number of Google searches with the term unemployment office has changed over the past week for the Chicago metro area or explore how unemployment became one of the top searched issues across the U.S. during the early months of the pandemic here.
Discussion Paper
Understanding the Racial and Income Gap in Covid-19: Health Insurance, Comorbidities, and Medical Facilities
Our previous work documents that low-income and majority-minority areas were considerably more affected by COVID-19, as captured by markedly higher case and death rates. In a four-part series starting with this post, we seek to understand the reasons behind these income and racial disparities. Do disparities in health status translate into disparities in COVID-19 intensity? Does the health system play a role through health insurance and hospital capacity? Can disparities in COVID-19 intensity be explained by high-density, crowded environments? Does social distancing, pollution, or the age ...
Journal Article
Nontraditional Insurance and Risks to Financial Stability
Do insurance companies pose a threat to financial stability? Historically, the answer has been no. But the insurance industry?s expansion into nontraditional activities has prompted reconsideration.