Regulatory Forbearance in the U.S. Insurance Industry: The Effects of Removing Capital Requirements for an Asset Class

63 Pages Posted: 25 Feb 2020 Last revised: 27 Jan 2021

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

Boston University - Questrom School of Business; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 26, 2021

Abstract

We analyze the effects of a reform of capital regulation for U.S. insurance companies in 2009. Its design eliminates capital buffers against unexpected losses associated with portfolio holdings of MBS, but not for other fixed-income assets. After the reform, insurance companies are much more likely to retain downgraded MBS compared to other downgraded assets. This pattern is more pronounced for financially constrained insurers. Exploiting discontinuities in the reform's implementation, we can identify the relevance of the capital-requirements channel. We also document that the insurance industry crowds outs other investors in the new issuance of (high-yield) MBS.

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 Removing Capital Requirements for an Asset Class (January 26, 2021). 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

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
129
Abstract Views
1,067
Rank
326,293
PlumX Metrics