Periodic Reporting for period 2 - LIFE (Financial Intermediation of Long-Term Savings)
Okres sprawozdawczy: 2022-08-01 do 2024-01-31
Against a backdrop of population aging and secular decline in interest rates, traditional state and occupational pension systems are under stress, forcing households to increasingly rely on their own savings and to bear financial markets risk. Financial intermediaries increasingly take up the role of collecting and investing households’ long-term savings. In the EU, household savings intermediated by life insurers amount to 8 trillion euros or 22% of aggregate household financial wealth. Moreover, life insurers are not pass-through intermediaries: They actively provide households with insurance against market risk through intergenerational risk sharing mechanisms and return guarantees. In ERC LIFE, I use a combination of unique regulatory data, empirical designs grounded in theory, and careful identification strategies, to understand the role of life insurers in intermediating households’ long-term savings and providing them with insurance against financial markets risk. I study how savings products embedding such insurance share aggregate risk between households and intermediaries, and between different cohorts of households. I study the impact of competition between financial intermediaries and the impact of capital constraints on the provision of insurance against aggregate risk.
I have completed a project on inter-cohort risk sharing in retail savings products sold by life insurers in France (“contrats en euro”). These products represent one-third of aggregate financial savings of French households. The first outcome of the project is a quantification of the amount of wealth transfer across cohorts of investors taking place in euro contracts, which is of the order of 0.8% of GDP per year. The second novel result of this project is a theoretical and empirical investigation into the inner working of euro contracts. On the theoretical front, we show that while inter-cohort risk sharing is desirable because it allows households to earn a risk premium without bearing the full risk, inter-cohort risk sharing can only be sustained in a competitive environment if households are not fully strategic. On the empirical front, we show that households are indeed not strategic in the sense that they fail to time their investments in euro contracts, which sustain the risk sharing scheme. The third contribution of the paper is a theoretical analysis of a portfolio choice model in which investors can allocate their savings in a risk-free asset, a risky asset, and euro contracts. The main result on this front is that the inclusion of euro contracts to the set of investable assets has a significant on investors’ welfare. The project is joint with Victor Lyonnet and resulted in the publication of the article “Can Risk be Shared Across Investor Cohorts? Evidence from a Popular Savings Product” in the Review of Financial Studies.
The results in “Can Risk be Shared Across Investor Cohorts? Evidence from a Popular Savings Product” go beyond previous state of the art on several fronts. First, it is the first empirical analysis of private implementation of inter-cohort risk sharing. The analysis is both qualitative with a detailed account of the inner working of the mechanism through which insurers intermediate this risk sharing scheme, and quantitative with a precise quantification of the amount of wealth redistributed through this scheme. Second, we extend previous theoretical literature on the feasibility of inter-cohort risk sharing by establishing conditions under which it can be sustained when competition between financial intermediaries is oligopolistic. An additional contribution on the theoretical side is to embed this framework in a portfolio allocation model, which allows us to quantify the welfare gains of savings products embedding inter-cohort risk sharing.