Ralph S. J. Koijen
London Business School - Department of Finance; National Bureau of Economic Research (NBER)
Federal Reserve Bank of Minneapolis
April 1, 2014
Swiss Finance Institute Research Paper No. 14-64
Liabilities ceded by life insurers to shadow reinsurers (i.e., affiliated and less regulated 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 raises 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 contain or eliminate shadow insurance. In the counterfactual without shadow insurance, the average company currently using shadow insurance would raise its price by 12 percent, and annual life insurance underwritten would fall by 11 percent for the industry.
Number of Pages in PDF File: 46
Keywords: Capital regulation, Life insurance industry, Regulatory arbitrage, Reinsurance, Special purpose vehicles
JEL Classification: G22, G28, L11, L51working papers series
Date posted: September 6, 2013 ; Last revised: January 6, 2015
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