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
There are 2 versions of this paper
Regulatory Forbearance in the U.S. Insurance Industry: The Effects of Removing Capital Requirements for an Asset Class
Regulatory Forbearance in the U.S. Insurance Industry: The Effects of Eliminating Capital Requirements
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: Suggested Citation