Shadow Insurance

Ralph S. J. Koijen and Motohiro Yogo
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Ralph S. J. Koijen: University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

No 14-64, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Life insurers use reinsurance to move liabilities from regulated and rated companies that sell policies to shadow reinsurers, which are less regulated and unrated off-balance-sheet entities within the same insurance group. U.S. life insurance and annuity liabilities ceded to shadow reinsurers 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. By relaxing capital requirements, shadow insurance could reduce the marginal cost of issuing policies and thereby improve retail market efficiency. However, shadow insurance could also reduce risk-based capital and increase expected loss for the industry. We model and quantify these effects based on publicly available data and plausible assumptions.

Keywords: Capital regulation; Demand estimation; Life insurance industry; Regulatory arbitrage; Reinsurance (search for similar items in EconPapers)
JEL-codes: G22 G28 L11 L51 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2014-12, Revised 2016-05
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Shadow Insurance (2016)
Working Paper: Shadow Insurance (2014)
Working Paper: Shadow Insurance (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1464

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