Working Paper: NBER ID: w19568
Authors: Ralph S.J. Koijen; Motohiro Yogo
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: Shadow Insurance; Life Insurance; Capital Requirements; Regulatory Framework
JEL Codes: G22; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shadow insurance (G22) | marginal cost of issuing policies (G22) |
| reduces marginal cost of issuing policies (G22) | retail market efficiency (L81) |
| shadow insurance (G52) | annual life insurance issued (G22) |
| shadow insurance (G52) | risk-based capital (G22) |
| shadow insurance (G52) | 10-year cumulative default probability (G33) |
| shadow insurance (G22) | liabilities ceded to shadow reinsurers (G22) |