From Long to Short: How Interest Rates Shape Life Insurance Markets

This paper explores how financial institutions pass interest rate risk through to product markets using the life insurance industry as a setting. We show theoretically that it is optimal for insurers to distort product issuance across maturities to offset duration gaps. We examine insurers exogenously exposed to interest rate risk through their variable annuity liabilities after the 2008 financial crisis. Consistent with our mechanism, exposed insurers developed negative duration gaps, increased markups on long-duration products, and shifted issuance toward shorter-duration products to hedge. As a result, long-term life insurance coverage declined by 31% of GDP between 2005 and 2023.

Source: arXiv:2608.04925v1 - http://arxiv.org/abs/2608.04925v1 PDF: https://arxiv.org/pdf/2608.04925v1 Original Link: http://arxiv.org/abs/2608.04925v1