Regulatory Limits to Risk Management

Harvard Business School Working Paper

87 Pages Posted: 26 Mar 2019 Last revised: 14 May 2020

See all articles by Ishita Sen

Ishita Sen

Harvard University - Harvard Business School

Date Written: September 1, 2019


Using derivative positions and a regulatory change that results in different regulatory risk sensitivities for economically similar products, I show that inconsistencies in regulatory incentives restrict hedging and increase shadow insurance for U.S. life insurers. Insurers exposed to products that became fully risk sensitive increase interest rate and equity risk hedging. However, insurers exposed to products that became sensitive only to equity movements, hedge equity but not interest rate risk, and shift exposures to shadow insurers. My findings have implications for the fragility of insurers as regulation interacts with monetary policy to shut down hedging incentives when interest rates rise.

Keywords: Interest Rate Risk Management, Minimum Return Guarantees, Capital Regulation, Shadow Insurance, Collateral Constraints

JEL Classification: G11, G12, G22, G28, G32

Suggested Citation

Sen, Ishita, Regulatory Limits to Risk Management (September 1, 2019). Harvard Business School Working Paper, Available at SSRN: or

Ishita Sen (Contact Author)

Harvard University - Harvard Business School ( email )

Soldiers Field
Baker Library
Boston, MA 02163
United States

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