Shadow Insurance Usage and Capital Management in Life Insurance Groups

40 Pages Posted: 27 Mar 2016 Last revised: 9 Nov 2017

See all articles by Felix Irresberger

Felix Irresberger

University of Leeds - Leeds University Business School (LUBS)

Ying Peng

Temple University - Risk Management & Insurance & Actuarial Science

Date Written: November 8, 2017

Abstract

This paper investigates why U.S. life insurance groups use shadow insurance, i.e., reinsure their risks using affiliated, unauthorized, and unrated off-balance sheet entities rather than traditional reinsurers, and how such activities are allocated to individual group members. We find that such regulatory arbitrage through shadow insurance activities is motivated by large deviation from an insurance group’s optimal capital structure and is primarily exercised by larger groups with already high risk-based capital ratios. Rather than smoothing capitalization across firms using affiliated reinsurers’ capacity, insurance groups allocate the amount of shadow insurance to only a few highly levered, less capitalized, and larger life insurers within the group, with leverage having the largest impact on shadow insurance usage.

Keywords: Regulatory Arbitrage, Capital Management, Life Insurers, Shadow Insurance, Internal Capital Markets.

JEL Classification: G01, G22, G23, G28

Suggested Citation

Irresberger, Felix and Peng, Ying, Shadow Insurance Usage and Capital Management in Life Insurance Groups (November 8, 2017). Fox School of Business Research Paper No. 16-022. Available at SSRN: https://ssrn.com/abstract=2754489 or http://dx.doi.org/10.2139/ssrn.2754489

Felix Irresberger (Contact Author)

University of Leeds - Leeds University Business School (LUBS) ( email )

Leeds LS2 9JT
United Kingdom

Ying Peng

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1301 Cecil B. Moore Ave.
Philadelphia, PA 19122
United States

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