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Regulatory capital and asset risk transfer

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  • Kyeonghee Kim
  • J. Tyler Leverty
  • Joan T. Schmit

Abstract

We explore whether life insurers use a unique reinsurance arrangement to manage assets tied to their regulatory capital. Typical reinsurance allows insurers to reduce their regulatory capital by transferring liabilities (reserves), and the associated assets, to reinsurers. With modified coinsurance (ModCo), insurers maintain control of their liabilities and assets while transferring regulatory capital requirements to the reinsurer. Holding fixed an insurer's reported capital, we find that ModCo allows insurers to report higher risk‐based capital ratios. Insurers with ModCo are less likely to fire sale downgraded bonds. We also find suggestive evidence of regulatory arbitrage, as most ModCo is purchased from reinsurers in countries with low capital requirements or within the same insurance group.

Suggested Citation

  • Kyeonghee Kim & J. Tyler Leverty & Joan T. Schmit, 2023. "Regulatory capital and asset risk transfer," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 90(4), pages 1027-1061, December.
  • Handle: RePEc:bla:jrinsu:v:90:y:2023:i:4:p:1027-1061
    DOI: 10.1111/jori.12441
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    References listed on IDEAS

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