Title page
Contents
Abstract 2
1. Introduction 3
2. Model of Insurance Prices and Illiquid Asset Prices 8
3. Theoretical Results 12
4. Data and Methodology 17
4.1. Measuring Insurance Prices 17
4.2. Measuring Insurer Expected Investment Returns 19
4.3. Measuring the Stability of Insurance Underwriting Funding 20
4.4. Data 21
4.5. Summary Statistics 23
5. Empirical Results 23
5.1. Expected Investment Returns and the Time Series of Prices 23
5.2. Stable Insurance Funding and Illiquid Asset Allocations 26
5.3. Expected Investment Returns and the Cross-Section of Prices 29
6. Discussion of Alternative Mechanisms 33
6.1. Insurer capital constraints 33
6.2. Demand for insurance 35
6.3. Reinsurance activity 37
7. Conclusion 37
References 39
Internet Appendix 54
A. Proofs of Theoretical Results 55
A.1. Proofs of Theorems 55
A.2. Proofs of Propositions 58
A.3. Insurance Market Equilibrium 61
B. Robustness Checks and Additional Empirical Results 62
B.1. Robustness Checks for Table 4: Asset Allocation Results 62
B.2. Robustness Checks for Table 2 and 3: Time series results 65
B.3. Extension and Robustness for Table 5: Cross-sectional results 76
C. Methodology and data 78
C.1. Measuring the average insurers' investment opportunity 78
C.2. Measuring and interpreting insurer net yields in the cross-section of insurers 79
C.3. Working with the SNL database and aggregating insurer entities at the group level 81
Table 1. Summary statistics 47
Table 2. Investment returns and the time series of prices: life insurance 48
Table 3. Investment returns and the time series of prices: P&C Insurance 50
Table 4. Funding stability and investment risk: P&C Insurance 51
Table 5. Investment returns and the cross-section of prices: P&C Insurance 52
Table 6. Funding stability, investment returns, and insurance prices: A two-step estimation 53
Figure 1. Expected investment returns and the time series of insurance prices 44
Figure 2. Expected investment returns and the cross-section of insurance prices 45
Figure 3. The cross-sectional relationship between expected investment returns and insurance prices for different rating groups 46
Table B.1. Asset allocation and alternative measures of funding stability 63
Table B.2. Sensitivity of investment risk to funding stability controlling for size 64
Table B.3. Time series results with alternative measures of expected excess returns 65
Table B.4. Time series results with Gilchrist and Zakrajsek (2012) decomposed credit spread 67
Table B.5. Life Insurance Time Series - Estimates in Changes 68
Table B.6. Life Insurance Time Series - Full Specification Estimates 72
Table B.7. Investment returns and the cross-section of life insurance prices 76
Table B.8. Investment returns and the cross-section of prices: individual P&C insurance business lines 77
Table C.1. Insurer financial reports aggregated to the industry level 84
Table C.2. Understanding the investment returns of insurance companies 85
Figure C.1. Variation in the expected investment returns of insurance companies 83