Shadow Insurance

Ralph S. J. Koijen and Motohiro Yogo

No 505, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: Liabilities ceded by life insurers to shadow reinsurers (i.e., affiliated and less regulated off-balance-sheet entities) grew from $11 billion in 2002 to $364 billion in 2012. Life insurers using shadow insurance, which capture half of the market share, ceded 25 cents of every dollar insured to shadow reinsurers in 2012, up from 2 cents in 2002. Our adjustment for shadow insurance reduces risk-based capital by 53 percentage points (or 3 rating notches) and raises default probabilities by a factor of 3.5. We develop a structural model of the life insurance industry and estimate the impact of current policy proposals to contain or eliminate shadow insurance. In the counterfactual without shadow insurance, the average company currently using shadow insurance would raise its price by 12 percent, and annual life insurance underwritten would fall by 11 percent for the industry.

Keywords: Special purpose vehicles; Life insurance industry; Capital regulation; Reinsurance; Regulatory arbitrage (search for similar items in EconPapers)
JEL-codes: G22 G28 L11 L51 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2014-11-26
New Economics Papers: this item is included in nep-ias and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.minneapolisfed.org/research/sr/sr505.pdf Full text (application/pdf)

Related works:
Journal Article: Shadow Insurance (2016)
Working Paper: Shadow Insurance (2016)
Working Paper: Shadow Insurance (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:505

Access Statistics for this paper

More papers in Staff Report from Federal Reserve Bank of Minneapolis Contact information at EDIRC.
Bibliographic data for series maintained by Kate Hansel ().