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Shadow Insurance

Author(s): Koijen, RSJ; Yogo, Motohiro

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Abstract: © 2016 The Econometric Society. 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.
Publication Date: May-2016
Citation: Koijen, RSJ, Yogo, M. (2016). Shadow Insurance. Econometrica, 84 (3), 1265 - 1287. doi:10.3982/ECTA12401
DOI: doi:10.3982/ECTA12401
ISSN: 0012-9682
EISSN: 1468-0262
Pages: 1265 - 1287
Type of Material: Journal Article
Journal/Proceeding Title: Econometrica
Version: Final published version. Article is made available in OAR by the publisher's permission or policy.

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