Shadow Insurance

Abstract

APPENDIX A: STYLIZED EXAMPLES OF CAPTIVE REINSURANCE WE ILLUSTRATE THE BALANCE SHEET MECHANICS of how an operating company can increase statutory capital by ceding reinsurance to an unauthorized captive. We offer three examples to illustrate the three main types of reinsurance: coinsurance, coinsurance with funds withheld, and modified coinsurance. 1 The latter two types differ from coinsurance in that the ceding company retains control of the assets, so the captive does not need to establish a trust fund. The examples show that the three types of reinsurance can achieve the same economic outcomes. We refer the reader to Loring and Higgins (1997) and Tiller and Tiller (2009, Chapters 4-5) for further details.

The Life Insurance Industry and Systemic Risk: A Bond Market Perspective

“…We still need to understand the risk of an insurance 'walk' and whether one could pose a systemic threat. In addition, the potential contribution of other areas such as the insurance state guarantee system (Cummins and Weiss, 2014;Koijen and Yogo, 2016b) and captive reinsurance (Koijen and Yogo, 2016a) to systemic risk are fruitful areas for future research. Aggregate turnover rate is total sales of investment grade corporate bonds in a year (as measured by TRACE) divided by the total amount outstanding for all investment grade corporate bonds.…”

“…Koijen and Yogo (2016a) argue that captive reinsurance, a common practice that allows primary insurers to hold less regulatory capital, leads to greater opacity and leverage in the insurance sector and significantly increases the probability of an insurer default. Foley-Fisher, Narajabad and Verani (2015) show certain forms of insurer funding can also be vulnerable to runs.…”

Securities Lending as Wholesale Funding: Evidence from the U.S. Life Insurance Industry

“…In light of these vulnerabilities, measures such as the degree of liquidity transformation in 27 Regulatory arbitrage as a source of reach for yield has already been documented in the U.S. life insurance industry through the deliberate portfolio selection of more risky corporate bonds within a rating class (Becker & Ivashina 2015), the use of captive reinsurers to lower regulatory capital charges (Koijen & Yogo 2016), and the issuance of institutional funding agreements (Foley-Fisher et al 2015).…”

Financial Stability Policies for Shadow Banking

“…Life insurers' reinsurance to captives has grown significantly in recent years, from $11 billion in 2002 to an estimated $364 billion in 2012 according to Koijen and Yogo (2013), see Figure 11. Koijen and Yogo further document that captive reinsurance is primarily used by the largest insurance companies which are estimated to cede one quarter of all insured dollars to shadow reinsurers in 2012.…”