Insurers’ Investments and Insurance Prices
Abstract
We develop a theory in which stable funding from insurance underwriting allows insurers to earn the liquidity premium on illiquid assets and pass part of it back to policyholders through lower prices. Consistent with the model’s predictions, we show empirically that (1) insurance prices are lower when the liquidity premium is higher, for both life insurers and property and casualty insurers. (2) In the cross-section, insurers with more stable funding earn higher expected returns and set lower prices. (3) It is specifically the part of expected returns driven by stable funding that passes through to prices. The findings highlight the value of insurance underwriting as a stable source of funding, with benefits that flow back to policyholders.
This paper was accepted by Bo Becker, finance.
Funding: The authors acknowledge support from the FRIC Center for Financial Frictions [Grant DNRF102].
Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.09038.

