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Assistant Professor of Finance
New York University, Stern School of Business
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 Costs of Hedging Disaster Risk and Home Prices in the Face of Climate Change
with Ammon Lam and Ryan Lewis (Link)
Climate models predict that many natural hazards will become increasingly damaging and costly to insure as the effects of climate change manifest. We study how the cost of hedging disaster risk changes home prices by using a 2012 law that mandated flood insurance premium increases for properties discontinuously around flood zone boundaries and based on the timing of construction. With a triple-difference design, we estimate that a $1 increase in today's annual flood insurance premiums causes a reduction of $41 in home prices for homes not exposed to future flooding from sea level rise. The effect is five times larger for homes that are exposed to sea level rise, suggesting that insurance pricing can accelerate the incorporation of climate risk in asset markets. Our results contrast the prior literature, which finds little effect of flood insurance pricing on home values, and have important policy implications for flood insurance pricing and rate regulation in private insurance (e.g., fire).
How Do Health Insurance Costs Affect Firm Labor Composition and Technology Investment?
with Janet Gao, Lawrence Schmidt, Cristina Tello-Trillo
draft available upon request, public posting pending Census approval (Link to slides)
Employer-sponsored healthcare insurance is a significant component of labor costs. We examine the causal effect of health insurance premiums on firms’ employment, both in terms of quantity and composition, and their technology investment decisions. To address endogeneity concerns, we instrument for insurance premiums using idiosyncratic variation in insurers' losses, which is plausibly exogenous to their customers who are employers. Using Census micro data, we show that following an increase in premiums, firms reduce employment. Relative to higher-skilled coworkers, lower-skilled workers are more likely to be laid off and remain unemployed for two years following the shock. Firms also invest more in information technology, potentially to substitute for labor.
“How Does Investor Demand Affect CLO Creation, Firm Borrowing, and Investment?”
with Abhishek Bhardwaj and Saptarshi Mukherjee (Link)
The collateralized loan obligation (CLO) market has grown drastically, with the amount outstanding rising from $100 Billion in 2005 to $650 Billion in 2020. We examine the effect of investors' demand on new CLO deal formation as well as on corporate borrowing and investment. We do so by using detailed data from insurance companies, which are the largest group of CLO investors. We present three main findings. First, when insurers experience favorable operating 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 borrowing firms, those more affected (through CLO managers) are more likely to receive new loans, as well as increase leverage and investment. Our results imply that investor demand affects CLO deal formation, as well as corporate borrowing and capital structure decisions. We also present evidence that insurers' aggregate demand for CLOs, proxied by their cash flows, is important for the growth of the CLO market segment that is exposed to insurers through past relationships.
Select Work In Progress
– “The Effect of Warming on Home Prices and The Unequal Distribution of Climate Adaptation” with Ryan Lewis and Yiwen Lu
– “Measuring Insurers’ Climate Risk” with Richard Berner, Robert Engle, and Hyeyoon Jung
– “Corporate Risk Management and Moral Hazard—Evidence from Employer Health Insurance” with Yiwen Lu
– “Broker Competition and Health Insurance Costs” with Yuan Gao
– “Real Effects of Financial Shocks––Evidence from Opioid Prescriptions” with Isil Erel, Pengfei Ma
– “Insurer Loans” with Chuck Fang and Victoria Ivashina
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