Insurance and Pension Funds
Paper Session
Friday, Jan. 3, 2025 10:15 AM - 12:15 PM (PST)
- Ishita Sen, Harvard University
Pension Liquidity Risk
Abstract
Pension funds use interest rate swaps to hedge the interest rate risk arising from their liabilities. Analyzing regulatory data on Dutch pension funds, we first show that pension funds with higher hedging demand use swaps more aggressively. These swap positions expose pension funds to the risk of facing margin calls, which can exceed 10% of their total assets, when interest rates rise. Pension funds respond to realized margin calls by selling safe government bonds with medium-term maturities. This procyclical selling behavior adversely affects the prices of the sold bonds and thereby exposes pension funds to market liquidity risk.Equal Prices, Unequal Access: The Effects of National Pricing in the US Life Insurance Industry
Abstract
Regulators often promote financial inclusion by restricting prices. In response, firms may reduce the supply of their product, implying that some households lose from reduced access. This paper explores this tradeoff in the context of national price setting regulation in the US life insurance industry. I collect a new data set with over one million insurer-agent links across a subset of US commuting zones and document that poor commuting zones have fewer agents per household, fewer active insurers, and smaller and lower-rated insurers relative to rich commuting zones. Motivated by the data, I build a spatial model with multi-region insurers and households with heterogeneous preferences for differentiated life insurance products. The model captures the empirical spatial sorting patterns and admits clear predictions for how insurer location choices change in response to national pricing. I take the model to the data and estimate price elasticities for low- and high-income households. Under flexible pricing, welfare differences between the poorest commuting zones and the richest commuting zone are between 0.4-0.95% of yearly income, most of which comes from differential access to insurers. National pricing amplifies spatial access disparities due to the geographic reallocation of insurers toward richer markets. Place-based tax policies that target the access margin reduce welfare differences between poor and rich commuting zones by 10.3-20.6%.Performance Capital Flows in DC Pensions
Abstract
Are defined contribution (DC) pension funds capital flows sensitive to performance?In many countries, employees have the discretion to choose and switch their pension managers. However, given the widespread evidence on inertia in individual household financial choice, the answer is not clear. Using novel data on retirement accounts for
nearly 10 million individuals, we look at the employee pension-manager switching behavior conditional on plan risk-profile. We see that switching across managers even within the same pension product is not uncommon, and switching propensity increase over time. We also show that these capital flows across managers are sensitive to and
convex in fund performance. This account flow to performance sensitivity is an important pressure that is tied to managers incentives and portfolio allocation. Relatedly, we find that an increase in competitive pressure among pension providers is conducive to
shift to higher-yielding bond holdings conditional on risk of the plan.
Discussant(s)
Kerry Siani
,
Massachusetts Institute of Technology
Juliane Begenau
,
Stanford University
Johnny Tang
,
Cornell University
Clemens Sialm
,
University of Texas-Austin
JEL Classifications
- G2 - Financial Institutions and Services