The Contribution of Shadow Insurance to Systemic Risk

Shadow insurance is a regulatory loophole exploited by certain insurance groups to increase risk exposure, potentially destabilising the financial system. In this paper, we evaluate the contribution of shadow insurance to systemic risk of the global financial sector using a sample of 215 international insurance entities covering the 2004--2017 period. We detect shadow insurance by examining every reinsurance agreement on the Schedule S filings. Using both $Delta CoVaR$ and $SRISK$ measures, we find that the practice of shadow insurance is a significant driver of global systemic risk.