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Shadow Insurance

Ralph S. J. Koijen

London Business School - Department of Finance; National Bureau of Economic Research (NBER)

Motohiro Yogo

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

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Date posted: September 6, 2013 ; Last revised: February 19, 2015

Suggested Citation

Koijen, Ralph S. J. and Yogo, Motohiro, Shadow Insurance (February 18, 2015). 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
London Business School - Department of Finance ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Motohiro Yogo (Contact Author)
Federal Reserve Bank of Minneapolis ( email )
90 Hennepin Avenue
Minneapolis, MN 55401-1804
United States
HOME PAGE: http://sites.google.com/site/motohiroyogo/
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