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The evolution from life insurance to financial engineering

Author

Listed:
  • Ralph S. J. Koijen

    (University of Chicago)

  • Motohiro Yogo

    (Princeton University)

Abstract

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.

Suggested Citation

  • Ralph S. J. Koijen & Motohiro Yogo, 2021. "The evolution from life insurance to financial engineering," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 46(2), pages 89-111, September.
    • Handle: RePEc:pal:genrir:v:46:y:2021:i:2:d:10.1057_s10713-021-00068-1
    DOI: 10.1057/s10713-021-00068-1
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    References listed on IDEAS

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    Cited by:

    1. Kristy Jansen & Sven Klingler & Angelo Ranaldo & Patty Duijm, 2024. "Pension Liquidity Risk," Swiss Finance Institute Research Paper Series 24-16, Swiss Finance Institute.

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    More about this item

    Keywords

    COVID-19 crisis; Global financial crisis; Life insurance industry; Minimum return guarantee; Variable annuity;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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