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The Effect of Risk-Based Capital on Life Insurers' Investment Portfolios

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  • Kathy Petroni
  • Douglas Shackelford

Abstract

This paper analyzes the effects of risk-based capital (RBC) on life insurers' investment portfolio management. We test for RBC-induced portfolio adjustments by comparing the 1993 change in investment portfolio balances for 1,495 stock life insurers, dichotomized by RBC capitalization, with the annual changes in their balances for the preceding four years (a difference-in-differences approach). Despite widespread expectations of major restructuring in the investments of life insurers, our exhaustive set of tests generally fails to detect a response to the asset risk component of RBC standards. At most, there is weak evidence that the life insurance companies subject to the greatest regulatory oversight and reputational damage under RBC, reduced their holdings in mortgages, preferred stock, and low quality bonds. This paper was presented at the Financial Institutions Center's May 1996 conference on "

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  • Kathy Petroni & Douglas Shackelford, 1996. "The Effect of Risk-Based Capital on Life Insurers' Investment Portfolios," Center for Financial Institutions Working Papers 96-21, Wharton School Center for Financial Institutions, University of Pennsylvania.
    • Handle: RePEc:wop:pennin:96-21
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    Cited by:

    1. Höring, Dirk, 2012. "Will Solvency II market risk requirements bite? The impact of Solvency II on insurers' asset allocation," ICIR Working Paper Series 11/12, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).

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