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Shadow Insurance

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  • Ralph S.J. Koijen
  • Motohiro Yogo

Abstract

Liabilities ceded by life insurers to shadow reinsurers (i.e., affiliated and less regulated off-balance-sheet entities) 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. Our adjustment for shadow insurance reduces risk-based capital by 53 percentage points (or 3 rating notches) and raises default probabilities by a factor of 3.5. We develop a structural model of the life insurance industry and estimate the impact of current policy proposals to contain or eliminate shadow insurance. In the counterfactual without shadow insurance, the average company currently using shadow insurance would raise its price by 12 percent, and annual life insurance underwritten would fall by 11 percent for the industry.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19568.

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Date of creation: Oct 2013
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Handle: RePEc:nbr:nberwo:19568

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  1. Merrill, Craig B. & Nadauld, Taylor & Stulz, Rene M. & Sherlund, Shane M., 2012. "Did Capital Requirements and Fair Value Accounting Spark Fire Sales in Distressed Mortgage-Backed Securities?," Working Paper Series, Ohio State University, Charles A. Dice Center for Research in Financial Economics 2012-12, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  2. Ralph S.J. Koijen & Motohiro Yogo, 2012. "The Cost of Financial Frictions for Life Insurers," NBER Working Papers 18321, National Bureau of Economic Research, Inc.
  3. Kenneth A. Froot, 2001. "The Market for Catastrophe Risk: A Clinical Examination," NBER Working Papers 8110, National Bureau of Economic Research, Inc.
  4. Viral V. Acharya & Philipp Schnabl & Gustavo Suarez, 2010. "Securitization without risk transfer," NBER Working Papers 15730, National Bureau of Economic Research, Inc.
  5. Bo Becker & Victoria Ivashina, 2013. "Reaching for Yield in the Bond Market," NBER Working Papers 18909, National Bureau of Economic Research, Inc.
  6. Ralph Koijen & Stijn Van Nieuwerburgh & Motohiro Yogo, 2011. "Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice," NBER Working Papers 17325, National Bureau of Economic Research, Inc.
  7. Liran Einav & Amy Finkelstein & Paul Schrimpf, 2010. "Optimal Mandates and the Welfare Cost of Asymmetric Information: Evidence From the U.K. Annuity Market," Econometrica, Econometric Society, Econometric Society, vol. 78(3), pages 1031-1092, 05.
  8. Adiel, Ron, 1996. "Reinsurance and the management of regulatory ratios and taxes in the property--casualty insurance industry," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 22(1-3), pages 207-240, October.
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