Does Having an Affiliated Bank Improve Life Insurer Performance in a Turbulent Market?

Abstract

I find that life insurers with bank affiliates had higher premium growth rates than did other life insurers in 2008. The higher growth is derived mainly from annuity products (deposit‐type insurance products), which are often viewed as substitutes for bank certificates of deposit (CDs). The growth effect is consistent with cross‐selling between affiliated banks and affiliated life insurers. The spread between the guaranteed rates on annuity products and CDs in financial conglomerates widened in 2008, consistent with headquarters differentiating prices to move customers within the same group. In addition, the premium growth effect in 2008 is stronger for life insurers that suffered larger balance sheet shocks, as measured by the change in the risk‐based capital (RBC) ratio. The results support that headquarters used internal markets to reallocate resources to weaker divisions.

Do insurers use internal capital markets to manage regulatory scrutiny risk?

“…The author also provides empirical evidence in support of his theoretical model and shows that net ICM transactions are sensitive to both regulatory capitalization levels and firm performance. Chiang (2020) investigates the role that affiliated banks play in the life insurance market and finds that banks directed consumers towards affiliated life insurer products through cross‐selling to assist in improving insurer balance sheets during the 2008 financial crisis. Finally Ge (2022) studies pricing activity and ICM transactions within insurance groups which consist of both property‐casualty and life insurers.…”

“…The work of Niehaus (2018), Chiang (2020), and Ge (2022) indicate that ICMs in the life insurance industry can be used in an effort to allocate capital to those members in need of financial support. We contend that an additional (but related) motivation for the use of ICMs is the management of regulatory scrutiny risk.…”

“…9 The author also provides empirical evidence in support of his theoretical model and shows that net ICM transactions are sensitive to both regulatory capitalization levels and firm performance. Chiang (2020) investigates the role that affiliated banks play in the life insurance market and finds that banks directed 8 Reinsurance is a form of transfer in which insurers may transfer risk to other insurers. Firms may either cede or assume reinsurance, and they may do so either externally or internally.…”

Equity Investment Decisions of Operating Firms: Evidence from Property and Liability Insurers

“…However, Niehaus (2018) finds that insurance groups provide a risk-sharing mechanism for life insurers. Moreover, Chiang (2020) finds that life insurers with bank affiliates use internal capital market to reallocate resources to weaker divisions. Most recently, Fier and Liebenberg (2023) show that P&L insurers use internal capital markets to manage the risk of regulatory scrutiny.…”