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

52 Pages Posted: 11 Feb 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

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 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: Capital regulation, insurance industry, NAIC, Regulatory Reform, 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 (February 2020). CEPR Discussion Paper No. DP14373. Available at SSRN: https://ssrn.com/abstract=3535458

Bo Becker (Contact Author)

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

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

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