Financial Economics of Insurance

Cover
Contents
Preface
1. Introduction to Modern Insurance
	1.1 Overview of the Insurance Sector
		1.1.1 Liabilities
		1.1.2 Assets
		1.1.3 Leverage
		1.1.4 Ownership Structure
	1.2 Insurance Products
		1.2.1 Life Insurance
		1.2.2 Fixed Annuities
		1.2.3 Variable Annuities
	1.3 Insurance Data
		1.3.1 Financial Statements
		1.3.2 Insurance Prices
	1.4 Institutional Background
		1.4.1 State Guaranty Associations
		1.4.2 Risk-Based Capital Regulation
		1.4.3 Accounting Standards
	1.5 A Baseline Model of Insurance Pricing
		1.5.1 Insurance Market
		1.5.2 Balance Sheet Dynamics
		1.5.3 Financial Frictions
		1.5.4 Optimal Pricing
		1.5.5 Empirical Implications
2. Risks in the Insurance Sector
	2.1 Variable Annuities
	2.2 Derivatives
	2.3 Evidence on Risk Mismatch
		2.3.1 Interest Risk Mismatch
		2.3.2 SRISK
		2.3.3 Stock Returns during the COVID-19 Crisis
	2.4 Shadow Insurance
		2.4.1 A Case Study of MetLife
		2.4.2 Aggregate Facts
	2.5 Securities Lending
	2.6 Potential Transmission Mechanisms
		2.6.1 Corporate Bond Market
		2.6.2 Households
		2.6.3 Firms
		2.6.4 Banks
3. Insurance Pricing
	3.1 Annuity and Life Insurance Prices
		3.1.1 Summary Statistics
		3.1.2 Pricing during the Global Financial Crisis
		3.1.3 Evidence against Default Risk
	3.2 Statutory Reserve Regulation
		3.2.1 Term Annuities
		3.2.2 Life Annuities
		3.2.3 Life Insurance
	3.3 Insurance Pricing Model
		3.3.1 Insurance Market
		3.3.2 Balance Sheet Dynamics
		3.3.3 Financial Frictions
		3.3.4 Optimal Pricing
		3.3.5 Empirical Implications
	3.4 Estimating the Insurance Pricing Model
		3.4.1 Empirical Specification
		3.4.2 Identifying Assumptions
		3.4.3 Marginal Cost of Capital
	3.5 Evidence for Financial Frictions
		3.5.1 Frictions in External Capital Markets
		3.5.2 Frictions in Internal Capital Markets
4. Modeling Supply and Demand
	4.1 Aggregate Facts about the Variable Annuity Market
	4.2 A Model of Variable Annuity Supply
		4.2.1 Variable Annuity Market
		4.2.2 Balance Sheet Dynamics
		4.2.3 Financial Frictions
		4.2.4 Optimal Fee and Rollup Rate
		4.2.5 Evidence from the Cross Section of Insurers
	4.3 Estimating Variable Annuity Demand
		4.3.1 A Model of Variable Annuity Demand
		4.3.2 Identifying Assumptions
		4.3.3 Estimation Methodology
		4.3.4 Estimated Model of Variable Annuity Demand
		4.3.5 Consumer Surplus
	4.4 Estimating Variable Annuity Supply
		4.4.1 Empirical Specification
		4.4.2 Estimation Methodology
		4.4.3 Estimated Model of Variable Annuity Supply
5. Reinsurance
	5.1 Risk of Shadow Insurance
		5.1.1 Relation between Ratings and Shadow Insurance
		5.1.2 Estimating Risk
		5.1.3 Estimating Expected Loss
	5.2 A Model of Insurance Pricing and Reinsurance
		5.2.1 Insurance Holding Company
		5.2.2 Balance Sheet Dynamics
		5.2.3 Financial Frictions
		5.2.4 Optimal Pricing and Reinsurance
		5.2.5 Holding Company’s Risk-Based Capital
	5.3 Modeling the Life Insurance Market
		5.3.1 A Model of Life Insurance Demand
		5.3.2 Empirical Specification for Marginal Cost
		5.3.3 Identifying Assumptions
		5.3.4 Estimated Model of the Life Insurance Market
		5.3.5 Retail Market in the Absence of Shadow Insurance
6. Portfolio Choice and Asset Pricing
	6.1 Insurers’ Bond Portfolios
		6.1.1 Portfolio Composition
		6.1.2 Duration
		6.1.3 Credit Risk
	6.2 A Portfolio Puzzle for Insurers
	6.3 Asset Pricing with an Insurance Sector
		6.3.1 Financial Assets
		6.3.2 Insurers
		6.3.3 Portfolio-Choice Problem
		6.3.4 Optimal Portfolio Choice
		6.3.5 Asset Prices
		6.3.6 Insurers’ Optimal Portfolio
	6.4 Empirical Implications
		6.4.1 Demand for Low-Beta Assets
		6.4.2 Sensitivity to Risk-Based Capital
		6.4.3 Trend in Relative Credit Risk
	6.5 Potential Extensions
		6.5.1 Interest Risk Mismatch
		6.5.2 Capital Structure
		6.5.3 Insurance Pricing
		6.5.4 Agency Problems
7. Research Topics and Policy Implications
	7.1 Research Topics
		7.1.1 Insurance of New Risks
		7.1.2 Microfoundations of Insurance Demand
		7.1.3 Regulatory Gaps
		7.1.4 Political Economy of Insurance Regulation
		7.1.5 Optimal Insurance Regulation
	7.2 Policy Implications
		7.2.1 Financial Disclosure
		7.2.2 Stress Tests
		7.2.3 Regulatory Oversight
Appendix A. Data Appendix
	A.1 Variables Based on the Financial Accounts of the United States
	A.2 Insurer Characteristics
	A.3 Portfolio of US Life Insurers
Appendix B. Optimality Conditions for a Multiproduct Insurer
Bibliography
Index