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Capital regulation and product market outcomes

Ishita Sen () and David Humphry ()
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Ishita Sen: London Business School
David Humphry: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 715, Bank of England working papers from Bank of England

Abstract: This paper examines the impact of the introduction of a risk-based capital regulation regime in 2002 on product market outcomes for the insurance industry in the United Kingdom. Using proprietary data on stress-test submissions from the Bank of England, we develop a measure of firm-level shocks to regulatory constraints that is plausibly exogenous to shifts in insurance demand. We find that constrained firms reduced underwriting relative to unconstrained firms, particularly for traditional insurance products which became more capital intensive in the new regulatory regime. The reduction in underwriting was not as pronounced for linked products, products that are mainly investment vehicles like mutual funds, implying a shift in the equilibrium product mix from traditional to linked. We also show that a higher proportion of constrained firms restructured their balance sheets by transferring assets and liabilities and went through reorganizations ie a change in legal owner of the firm.

Keywords: Risk-based capital regulation; stress testing; life insurance; trends in asset management (search for similar items in EconPapers)
JEL-codes: G22 G28 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ias and nep-rmg
Date: 2018-03-02
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