George Zanjani

Abstract: We reexamine insurance and annuity pricing during the 2008 financial crisis. We find that the existing narrative—of insurers selling policies at significant economic loss to gain statutory accounting benefits—is false. In fact, a substantial number of contracts decreased statutory capital upon sale. Instead, we show that pricing was set to produce high rates of return on capital, consistent with standard theories of pricing in the presence of financial frictions. We establish that the experience in 2008 was not extraordinary but mirrored other episodes of bond market stress where corporate borrowing rates rose quickly, such as in 1994, 1999, and 2013. A key finding across these periods is an inversion of the expected relationship between price and default risk, where—in contrast to the existing narrative—financially weaker companies quoted higher, not lower, prices than their stronger counterparts.

Abstract: This paper studies the impact of public insolvency guarantees on market discipline in the U.S. life insurance industry. We key identification to risk changes in firms operating in both protected and unprotected states. Overall, we find detectable but modest effects, with some evidence of more pronounced impact for annuities and deposits in companies with low financial ratings. We also find little evidence connecting enactments or expansions in coverage to increases in risk at either the company or state levels.