Essays on Shadow Insurance

Abstract

This dissertation discovers an important development in the life reinsurance market and investigates two problems behind the rapid growth of shadow insurance -- the motivation of shadow insurance activities and the underlying risks. The first part investigates why U.S. life insurance groups use shadow insurance, i.e., reinsure their risks using affiliated, unauthorized, and unrated off-balance-sheet entities rather than traditional reinsurers, and how such activities are allocated to individual group members. We find that regulatory arbitrage through shadow insurance activities is motivated by a large deviation from an insurance group's optimal capital structure and is primarily exercised by larger groups with relatively lower capital adequacy. Rather than smoothing capitalization across firms using affiliated reinsurers' capacity, insurance groups allocate the amount of shadow insurance to only a few highly leveraged, less capitalized, and larger life insurers within the group. The se