Ralph S. J. Koijen
London Business School - Department of Finance; National Bureau of Economic Research (NBER)
Federal Reserve Bank of Minneapolis
November 26, 2013
Liabilities ceded by life insurers to shadow reinsurers (i.e., less regulated off-balance sheet entities) grew from $11 billion in 2002 to $363 billion in 2012. Companies that are involved in shadow insurance, which capture 50 percent 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 49 percentage points (or 3 rating notches) and raises expected loss by at least $15.7 billion for the industry. We develop a structural model to estimate the impact of shadow insurance on equilibrium supply in the retail market. In the absence of shadow insurance, marginal cost would rise by 5.0 percent, and annual life insurance underwritten would fall by $19.6 billion at current demand elasticity.
Number of Pages in PDF File: 42
Keywords: Annuities, Capital regulation, Life insurance, Regulatory arbitrage, Reinsurance, Special purpose vehicles
JEL Classification: G22, G28working papers series
Date posted: September 6, 2013 ; Last revised: November 27, 2013
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