Ralph S. J. Koijen
London Business School - Department of Finance; Centre for Economic Policy Research (CEPR)
Princeton University - Department of Economics; National Bureau of Economic Research
January 12, 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
Date posted: September 6, 2013 ; Last revised: January 13, 2016
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