Search Results
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.
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 ...
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
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.
Newsletter
Financial Life After the Death of a Spouse
The death of a spouse results in a considerable decline in average income for the surviving spouse. The Social Security survivors benefits program compensates the surviving spouse, most often a woman, for almost all of the lost income, allowing them to work less, but many widows who are not yet eligible for the program struggle to meet their financial needs.
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 ...
Journal Article
Derivatives and Collateral at U.S. Life Insurers
Although insurers represent a relatively small part of the derivatives markets, they are an interesting case study, in part because they report very detailed information about their derivatives positions and associated collateral in quarterly regulatory filings. The authors exploit these data to study how derivatives are used by insurers and analyze the likely impact of regulatory reforms on their business models.
Newsletter
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.
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 ...
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 ...