Asset-Driven Insurance Pricing - Benjamin Knox
Speaker : Benjamin Knox (Federal Reserve Board)
We develop a theory that connects insurance premiums, insurance companies' investment behavior, and equilibrium asset prices. Consistent with the model's key predictions, we show empirically that (1) insurers with more stable insurance funding take more investment risk and, therefore, earn higher average investment returns; (2) insurance premiums are lower when expected investment returns are higher, both in the cross section of insurance companies and in the time series. We show our results hold for both life insurance companies and, using a novel approach, for property and casualty insurance companies. Consistent findings across different regulatory frameworks helps identify asset-driven insurance pricing while controlling for alternative explanations.