50 Pages Posted: 6 Sep 2013 Last revised: 19 May 2016
Date Written: January 12, 2016
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.
Keywords: Capital regulation, Demand estimation, Life insurance industry, Regulatory arbitrage, Reinsurance
JEL Classification: G22, G28, L11, L51
Suggested Citation: Suggested Citation
Koijen, Ralph S. J. and Yogo, Motohiro, Shadow Insurance (January 12, 2016). Econometrica, Vol. 84, No. 3, 2016; Swiss Finance Institute Research Paper No. 14-64. Available at SSRN: https://ssrn.com/abstract=2320921 or http://dx.doi.org/10.2139/ssrn.2320921