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Life insurance premiums

How Do Financial Constraints Affect Product Pricing?
Evidence from Weather and Life Insurance Premiums

Journal of Finance, 2022 (Link)

I identify the effects of financial constraints on firms’ product pricing decisions, using insurance groups containing both life and property & casualty (P&C) divisions. Following P&C divisions’ losses, life divisions change prices in a manner that can generate more immediate financial resources: premiums fall (rise) for life policies that immediately increase (decrease) insurers’ financial resources. Premiums change more in groups that are more constrained. Life divisions increase transfers to P&C divisions, suggesting P&C divisions’ shocks are transmitted to life divisions. Results hold when instrumenting for P&C divisions' losses with exposure to unusual weather damages, implying that the effects are causal.

The Role of Financial Conditions in Portfolio Choices: The Case of Insurers
with Michael Weisbach, Journal of Financial Economics, 2021 (Link)


Many institutional investors depend on the returns they generate to fund their operations and liabilities. How do these investors’ financial conditions affect the management of their portfolios? We address this issue using the insurance industry because insurers are large investors for which detailed portfolio data are available, and can face financial shocks from exogenous weather events that help us establish causality. Among corporate bonds, for which we can control for regulatory treatment, results suggest that when Property & Casualty (P&C) insurers become more constrained due to operating losses, they shift towards safer bonds. The effect of losses on allocations is likely to be causal since it holds when instrumenting for losses with weather shocks. The change in allocations following losses is larger for smaller or worse-rated insurers and during the financial crisis, suggesting that the shift toward safer securities is driven by concerns about financial flexibility. The results highlight the importance of financial conditions in institutional investors’ portfolio decisions.

Conflicting Interests and the Effect of Fiduciary Duty—Evidence from Variable Annuities
with Mark Egan and Johnny Tang,
Review of Financial Studies, 2022 (Link)
cited by the US Senate, featured in NYT


We examine the market for variable annuities, a popular retirement product with over $2.2 trillion in assets. Insurers pay brokers commissions for selling annuities, and brokers typically earn higher commissions for selling more expensive annuities. Our results indicate that sales are five times as sensitive to brokers' financial interests as to investors'. To limit conflicts of interest, the Department of Labor proposed a rule in 2016 holding brokers to a fiduciary standard. We find that after the proposal, sales of high-expense products fell by 52% as sales became more sensitive to expenses. Based on our structural estimates, investor welfare improved overall. 

The Effect of Insurance Premiums on the Housing Market and Climate Risk Expectations

with Ammon Lam and Ryan Lewis (Link)

Climate change threatens to worsen natural disasters and increase the cost of insuring against them. We study how insurance costs affect the housing market using a 2013 reform that raised flood insurance premiums for properties discontinuously around flood zone boundaries and construction year cutoffs. Using a triple-difference design, we find that treated homes experience a 2% relative decline in transaction prices. This effect is partly driven by increased expected risks triggered by higher premiums, rather than a pure cash-flow channel. The price effect is three times as large for homes exposed to long-term sea level rise, suggesting that insurance pricing can accelerate the incorporation of climate risk into asset markets. Higher premiums induce more rebuilding of treated homes, as well as reduce mortgage uptake as the required insurance becomes more costly.  

 How Do Health Insurance Costs Affect Low- and High-Income Workers?

with Janet Gao, Lawrence Schmidt, Cristina Tello-Trillo (Link)

Employer-sponsored health insurance is a significant component of labor costs. We examine the causal effect of health insurance premiums on firms’ employment and employment outcomes of low- versus high-income workers. To address endogeneity concerns, we instrument for insurance premiums using idiosyncratic variation in insurers' recent losses, which is plausibly exogenous to their customers who are employers. Using Census microdata, we show that following an exogenous increase in premiums, firms reduce employment. Lower-income workers become more likely to be separated from their jobs, become unemployed, experience a large earning reduction upon job separation, and be part-time (ineligible for health insurance benefits). 

 Does Loan Securitization Expose Borrowers to Non-Bank Investor Shocks?

with Abhishek Bhardwaj and Saptarshi Mukherjee (Link)

65% of syndicated term loans are now securitized and ultimately funded by CLO investors.  Presumably, with loans securitized and distributed to a large number of investors, borrowing firms are not only insulated from shocks to banks but also from idiosyncratic shocks to nonbank investors in CLOs. We provide evidence that, due to concentrated capital and sticky relationships, the CLO market exposes firms to shocks that are idiosyncratic to insurance companies, which are the largest group of CLO investors. We present three main findings. First, when insurers experience favorable cash flows, they are more likely to invest in CLO deals, especially deals by CLO managers that they previously invested with. Second, when CLO managers are more exposed to insurers' favorable cash flows through past relationships, they are more likely to launch new CLO deals. Third, among private borrowing firms, those more affected (through sticky relationships with CLO managers) experience drops in spreads on new loans. Such firms are more likely to take new loans, as well as increase their employment and the number of establishments. Our results imply that substantial frictions exist in the loan securitization market that cause firms to be exposed to idiosyncratic investor shocks.

Physical Climate Risk Factors and an Application to Measuring Insurers' Climate Risk Exposure

with Hyeyoon Jung, Robert Engle, and Xuran Zeng (Link)

We construct a novel physical risk factor by forming a portfolio of property and casualty (P&C) insurers' stocks, with each insurer's weight reflecting their operational exposure to states with high physical climate risk. Insurance companies can be exposed to climate-related physical risk through their operations and transition risk through their $12 trillion of financial asset holdings. We assess the climate risk exposure of P&C and life insurance companies in the U.S. We estimate insurers' dynamic physical climate beta, i.e. their stock return sensitivity to the physical risk factor. In addition, 
we calculate the expected capital shortfall of insurers under various climate stress scenarios. Validating our approach, we find that insurers with larger exposures to risky states have a higher sensitivity to physical risk, while insurers holding more brown assets have a higher sensitivity to transition risk.

Select Work In Progress

– The Effect of Warming on Home Prices and The Unequal Distribution of Climate Adaptation with Ryan Lewis and Yiwen Lu

–  “Catastrophe Risk Securitization and Insurance Pricing in the Face of Climate Change” with Tuomas Tomunen 

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