Ralph S. J. Koijen
London Business School - Department of Finance; National Bureau of Economic Research (NBER)
Federal Reserve Bank of Minneapolis
February 18, 2015
Swiss Finance Institute Research Paper No. 14-64
Liabilities ceded by life insurers to shadow reinsurers (i.e., less regulated and unrated off-balance-sheet entities) 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. Our adjustment for shadow insurance reduces risk-based capital by 53 percentage points (or 3 rating notches) and increases default probabilities by a factor of 3.5. We develop a structural model of the life insurance industry and estimate the impact of current policy proposals to limit or eliminate shadow insurance. In the counterfactual without shadow insurance, the average company using shadow insurance would raise prices by 10 to 21 percent, and annual life insurance underwritten would fall by 7 to 16 percent for the industry.
Number of Pages in PDF File: 53
Keywords: Capital regulation, Demand estimation, Life insurance industry, Regulatory arbitrage, Reinsurance
JEL Classification: G22, G28, L11, L51
Date posted: September 6, 2013 ; Last revised: February 19, 2015
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