The size of the shadow insurance sector could lead to losses of $15.7 billion for the life insurance industry, according to a study by economists at the Minneapolis Federal Reserve Bank and the London Business School.
The paper looks at the scope of captives and their impact on the life insurance industry.
The study notes that there are benefits to shadow insurance. The report finds that without the presence of captives the cost of life insurance could rise by 5 percent.
The authors of the report also found that there is a possibility of systemic risk from captive transactions. If a large life insurer that was involved in shadow insurance failed, the losses could be systemic, leading to large losses for the industry as a whole.
The study also finds that there is a lack of public disclosure with regards to reinsurance, which impedes “accurate assessment of their investment risk and the fragility of their funding arrangements.”
