March 02, 2018

BoE published a working paper that examines the impact of the introduction of a risk-based capital regulation regime in 2002 on product market outcomes for the insurance industry in the United Kingdom. The main contribution of that paper is that it helps to accurately measure regulatory constraints using proprietary data on stress-test submissions of insurance firms from the BoE.

Using proprietary data on stress-test submissions from the BoE, a measure of firm-level shocks to regulatory constraints is developed that is plausibly exogenous to shifts in insurance demand. The paper finds that constrained firms reduced underwriting relative to unconstrained firms, particularly for traditional insurance products that became more capital-intensive in the new regulatory regime. The reduction in underwriting was not as pronounced for linked products and products that are mainly investment vehicles such as mutual funds, implying a shift in the equilibrium product mix from traditional to linked. The paper also shows that a higher proportion of constrained firms restructured their balance sheets by transferring assets and liabilities and went through reorganizations—that is, a change in the legal owner of the firm.

 

Related Link: Working Paper (PDF)

Keywords: Europe, UK, Insurance, Banking, Securities, Capital Regulation, Product Market Outcomes, Stress Testing, BoE

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