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Insurers’ Investments and Insurance Prices

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Abstract

We develop a theory that connects insurance prices, insurance companies’ investment behavior, and equilibrium asset prices. Consistent with the model’s predictions, we show empirically that (1) insurers with more stable insurance funding take more investment risk and, therefore, earn higher average investment returns; (2) insurers set lower prices on policies when expected investment returns are higher, both in the cross-section of insurance companies and in the time series. Our results hold for both life insurance and property and casualty insurance companies. The findings show that insurers’ asset allocation and product pricing decisions are more connected than previously thought.

Suggested Citation

  • Benjamin Knox & Jakob Ahm Sørensen, 2024. "Insurers’ Investments and Insurance Prices," Finance and Economics Discussion Series 2024-058, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2024-58
    DOI: 10.17016/FEDS.2024.058
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    More about this item

    Keywords

    Insurance pricing; Portfolio choice; Corporate bonds;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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