Shadow Insurance

Ralph S.J. Koijen, Motohiro Yogo

Research output: Contribution to journalArticlepeer-review

29 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)1265-1287
Number of pages23
JournalEconometrica
Volume84
Issue number3
DOIs
StatePublished - May 1 2016

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Capital regulation
  • Demand estimation
  • Life insurance industry
  • Regulatory arbitrage
  • Reinsurance

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