Shadow insurance

Koijen, R and Yogo, M (2016) Shadow insurance. Econometrica, 84 (3). pp. 1265-1287. ISSN 1468-0262

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Official URL: http://onlinelibrary.wiley.com/doi/10.3982/ECTA124...

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.

Item Type: Article
Subjects: I > Insurance companies
R > Regulations
Subject Areas: Finance
DOI: 10.3982/ECTA12401
Date Deposited: 01 Nov 2016 18:57
Last Modified: 02 Nov 2016 13:43
URI: http://lbsresearch.london.edu/id/eprint/575

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