Regulatory Forbearance in the U.S. Insurance Industry: The Effects of Eliminating Capital Requirements

49 Pages Posted: 25 Feb 2020 Last revised: 3 Mar 2020

See all articles by Bo Becker

Bo Becker

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); ECGI

Marcus M. Opp

Stockholm School of Economics - Department of Finance; Swedish House of Finance

Farzad Saidi

New York University (NYU)

Multiple version iconThere are 2 versions of this paper

Date Written: January 30, 2020

Abstract

This paper documents the long-run effects of an important reform of capital regulation for U.S. insurance companies in 2009. We show that its design effectively eliminates capital requirements for (non-agency) MBS, implying an aggregate capital relief of over $18bn at the time of the reform. By 2015, 40% of all high-yield assets in the overall fixed-income portfolio are MBS investments. This result is primarily driven by insurers' reduced propensity to sell poorly-rated legacy assets. Using a regression discontinuity framework, we can attribute this behavior to capital requirements. We also provide evidence that the insurance industry, driven by large life insurers, crowds out other investors in the new issuance of (high-yield) MBS post reform. Our findings are consistent with the view that the regulation and supervision of the U.S. insurance sector is influenced by short-term industry interests.

Keywords: insurance industry, capital regulation, regulatory reform, NAIC, risk-based capital requirements

JEL Classification: G20, G22, G23, G28

Suggested Citation

Becker, Bo and Opp, Marcus M. and Saidi, Farzad, Regulatory Forbearance in the U.S. Insurance Industry: The Effects of Eliminating Capital Requirements (January 30, 2020). Swedish House of Finance Research Paper No. 20-6, Available at SSRN: https://ssrn.com/abstract=3528370 or http://dx.doi.org/10.2139/ssrn.3528370

Bo Becker

Stockholm School of Economics ( email )

Drottninggatan 98
Dept. of Finance
111 60 Stockholm, 11160
Sweden

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Marcus M. Opp (Contact Author)

Stockholm School of Economics - Department of Finance ( email )

SE-113 83 Stockholm
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

Farzad Saidi

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
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New York, NY 10003-711
United States

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