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Wednesday, August 4 • 9:00am - 10:30am
6A1 Regulatory Inconsistency and Shadow Insurance: The Impact of Solvency II on the US Insurance Market

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Jinjing Wang, University of Akron; Ruo Jia, Peking University; Shuyan Liu, Shanghai Finance and Economics University; Jainren Xu, University of North Texas

Abstract Inter-market regulatory inconsistency may lead to regulatory spillover and/or regulatory arbitrage effects across markets. We use the Solvency II reform in the European Union (EU) as a quasi-natural experiment to study the risk and capital dynamics in the U.S. property-casualty insurance market. We find that EU affiliated insurers operating in the U.S. market appear to improve their financial strength compared to U.S. domestic insurers after the reform by reducing asset and underwriting risk-taking, i.e., the evidence of regulatory spillover effects. Interestingly, after the reform, EU affiliated insurers cede more risks through shadow insurance (Koijen and Yogo, 2016) to affiliated, unauthorized, and unrated reinsurers, i.e., the evidence of regulatory arbitrage. The seemingly improved financial strength of EU affiliated insurers disappears after adjusting for the use of shadow reinsurance. The results indicate that the positive spillover effect of Solvency II is offset by the arbitrage effect of shadow insurance.


Arina Brutyan

PhD candidate and research Associate, Institute of Insurance Economics, University of St. Gallen


Jinjing Wang

University of Akron
avatar for Jianren Xu

Jianren Xu

University of North Texas

Wednesday August 4, 2021 9:00am - 10:30am EDT