Seminar

Shadow Insurance

Ralph Koijen (London Business School)

February 24, 2014, 12:30–14:00

Room MF 323

Paul Woolley Research Initiative Seminar

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. Companies 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 impairment probabilities by a factor of four. We develop a structural model of the life insurance industry to estimate the impact of current policy proposals to curtail shadow insurance. Without shadow insurance, marginal cost would rise by 18 percent, and annual life insurance underwritten would fall by 23 percent. (JEL G22, G28, L11)