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Shadow Insurance

Ralph S. J. Koijen

New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR)

Motohiro Yogo

Princeton University - Department of Economics; National Bureau of Economic Research

January 12, 2016

Econometrica, Vol. 84, No. 3, 2016
Swiss Finance Institute Research Paper No. 14-64

Life insurers use reinsurance to move liabilities from regulated and rated companies that sell policies to shadow reinsurers, which are less regulated and unrated off-balance-sheet entities within the same insurance group. U.S. life insurance and annuity liabilities ceded to shadow reinsurers grew from $11 billion in 2002 to $364 billion in 2012. Life insurers using shadow insurance, which capture half of the market share, ceded 25 cents of every dollar insured to shadow reinsurers in 2012, up from 2 cents in 2002. By relaxing capital requirements, shadow insurance could reduce the marginal cost of issuing policies and thereby improve retail market efficiency. However, shadow insurance could also reduce risk-based capital and increase expected loss for the industry. We model and quantify these effects based on publicly available data and plausible assumptions.

Number of Pages in PDF File: 50

Keywords: Capital regulation, Demand estimation, Life insurance industry, Regulatory arbitrage, Reinsurance

JEL Classification: G22, G28, L11, L51

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Date posted: September 6, 2013 ; Last revised: May 19, 2016

Suggested Citation

Koijen, Ralph S. J. and Yogo, Motohiro, Shadow Insurance (January 12, 2016). Econometrica, Vol. 84, No. 3, 2016; Swiss Finance Institute Research Paper No. 14-64. Available at SSRN: http://ssrn.com/abstract=2320921 or http://dx.doi.org/10.2139/ssrn.2320921

Contact Information

Ralph S. J. Koijen
New York University (NYU) - Department of Finance ( email )
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
HOME PAGE: http://www.koijen.net
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Motohiro Yogo (Contact Author)
Princeton University - Department of Economics ( email )
26 Prospect Ave
Princeton, NJ 08540-5296
United States
HOME PAGE: http://sites.google.com/site/motohiroyogo/

National Bureau of Economic Research
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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