The Effect of Risk-Based Capital on Life Insurers' Investment Portfolios

Kathy Petroni and Douglas Shackelford ()

Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, University of Pennsylvania

Abstract: This paper analyzes the effects of risk-based capital (RBC) on life insurers' investment portfolio management. We test for RBC-induced portfolio adjustments by comparing the 1993 change in investment portfolio balances for 1,495 stock life insurers, dichotomized by RBC capitalization, with the annual changes in their balances for the preceding four years (a difference-in-differences approach). Despite widespread expectations of major restructuring in the investments of life insurers, our exhaustive set of tests generally fails to detect a response to the asset risk component of RBC standards. At most, there is weak evidence that the life insurance companies subject to the greatest regulatory oversight and reputational damage under RBC, reduced their holdings in mortgages, preferred stock, and low quality bonds.

This paper was presented at the Financial Institutions Center's May 1996 conference on "

Date: 1996-05
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