Regulatory Capital, Business Growth, and Investment Risk: Evidence from Life Insurance Companies
57 Pages Posted: 18 Nov 2018 Last revised: 6 Oct 2019
Date Written: September 30, 2019
This paper examines how capital requirements affect life insurance companies' business growth and investment risk taking. I show through a simple model that capital requirements are negatively (positively) associated with life insurers' equilibrium business scale (average portfolio investment risk). Using staggered changes in U.S. state laws that enable life insurers to raise capital more easily, I find evidence consistent with the model's prediction: life insurers respond to these law changes by accelerating their insurance underwriting growth and reducing their allocation to risky investments on average. The effect is more pronounced for insurers that are less financially competitive.
Keywords: Capital Regulation, Charter Value, Investment Risk, Life Insurance, Financial Reinsurance
JEL Classification: G11, G22, G28, G32
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