Finance and Economics Discussion Series (FEDS)
July 2024
Insurers' Investments and Insurance Prices
Benjamin Knox and Jakob Ahm Sørensen
Abstract:
We develop a theory that connects insurance prices, insurance companies’ investment behavior, and equilibrium asset prices. Consistent with the model’s predictions, we show empirically that (1) insurers with more stable insurance funding take more investment risk and, therefore, earn higher average investment returns; (2) insurers set lower prices on policies when expected investment returns are higher, both in the cross-section of insurance companies and in the time series. Our results hold for both life insurance and property and casualty insurance companies. The findings show that insurers’ asset allocation and product pricing decisions are more connected than previously thought.
Keywords: Insurance pricing, Corporate bonds, Portfolio choice
DOI: https://doi.org/10.17016/FEDS.2024.058
PDF: Full Paper
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