Two researchers have posted a major new working paper on variable annuity contracts that come with minimum return guarantees.
The researchers — Ralph S.J. Koijen, an economist who teaches at New York University’s Stern School of Business, and Motohiro Yogo, an economist at Princeton University — wrote the paper to fill what they see as a major gap in the economic literature: a lack of research on variable annuity contract guarantees.
Researchers have published many papers about mutual funds that offer no guarantees, and they have also published papers about insurance products that protect the insureds against “idiosyncratic risk,” such as the risk of illness, or the risk of death, the economists write in their paper.
Those papers fail to reflect how life insurers’ business has changed, the economists write.
“The main business of life insurers is now savings products that insure market risk through minimum return guarantees,” Koijen and Yogo conclude.
Return guarantees account for a major share of life insurer liabilities in Austria, Denmark, France, Germany, the Netherlands and Sweden as well as in the United States, the economists say.
The economists have published their working paper, or early version of the paper, behind a paywall on the website of the National Bureau of Economic Research.
The paper is likely to get attention from other academic economists, and from economists involved in policymaking, because Koijen and Yogo are widely published, frequently cited scholars.
A paper on “shadow insurance” that Koijen and Yogo published in Econometrica in 2016 has been cited by other scholars 58 times. A paper on life insurers’ “financial friction” that they published in the American Economic Review in 2015 has been cited 85 times.
A link to a full version of the paper is available here.
Another version is available, behind a log-in wall but in front of a paywall, here,
Here’s a look at five highlights from the paper that might be of interest to life insurance agents and brokers.
1. Koijen and Yogo assume their readers know almost nothing about variable annuities.
The economists assume that their readers understand terms such as “financial friction,” “market incompleteness,” and “strictly positive stochastic discount factor” without any explanation.