Insurers' Investments and Insurance Prices
Abstract:
We develop a theory that connects insurance prices, 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) 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. To help control for alternative explanations, we show our results hold both for life insurance companies and, using a novel approach, for property and casualty insurance companies. Our findings show that insurers' asset allocation and product pricing decisions are more connected than previously thought.