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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

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, L51

working papers series

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Date posted: September 6, 2013 ; Last revised: January 6, 2015

Suggested Citation

Koijen, Ralph S. J. and Yogo, Motohiro, Shadow Insurance (April 1, 2014). 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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