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Shadow Insurance

Author

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  • 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.

Suggested Citation

  • Ralph S.J. Koijen & Motohiro Yogo, 2013. "Shadow Insurance," NBER Working Papers 19568, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:19568
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    References listed on IDEAS

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    1. Ralph S. J. Koijen & Motohiro Yogo, 2015. "The Cost of Financial Frictions for Life Insurers," American Economic Review, American Economic Association, vol. 105(1), pages 445-475, January.
    2. Ralph S.J. Koijen & Stijn Nieuwerburgh & Motohiro Yogo, 2016. "Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice," Journal of Finance, American Finance Association, vol. 71(2), pages 957-1010, April.
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    7. Tobias Adrian & Adam B. Ashcraft, 2012. "Shadow Banking Regulation," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 99-140, October.
    8. Merrill, Craig B. & Nadauld, Taylor D. & Stulz, Rene M. & Sherlund, Shane, 2012. "Did Capital Requirements and Fair Value Accounting Spark Fire Sales in Distressed Mortgage-Backed Securities?," Working Papers 13-01, University of Pennsylvania, Wharton School, Weiss Center.
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. A Primer on Securities Lending
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2016-11-07 19:49:47
    2. Too Big to Fail: MetLife v. FSOC
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2016-04-04 17:34:30
    3. Taking the **Sock** out of FSOC
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2018-10-29 12:24:21

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    Cited by:

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    2. Matteo Benetton, 2017. "Lenders' Competition and Macro-prudential Regulation: A Model of the UK Mortgage Supermarket," 2017 Meeting Papers 1001, Society for Economic Dynamics.
    3. Stefan Lewellen & Adi Sunderam & Mark Egan, 2017. "The Cross Section of Bank Value," 2017 Meeting Papers 1283, Society for Economic Dynamics.
    4. Braun, Alexander & Ben Ammar, Semir & Eling, Martin, 2019. "Asset pricing and extreme event risk: Common factors in ILS fund returns," Journal of Banking & Finance, Elsevier, vol. 102(C), pages 59-78.
    5. Abbassi, Puriya & Bräuning, Falk, 2018. "The pricing of FX forward contracts: Micro evidence from banks' dollar hedging," Discussion Papers 42/2018, Deutsche Bundesbank.
    6. Shi Chen & Jyh-Horng Lin & Wenyu Yao & Fu-Wei Huang, 2019. "CEO Overconfidence and Shadow-Banking Life Insurer Performance Under Government Purchases of Distressed Assets," Risks, MDPI, vol. 7(1), pages 1-25, March.
    7. Mark Egan & Stefan Lewellen & Adi Sunderam, 2017. "The Cross Section of Bank Value," NBER Working Papers 23291, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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