ABSTRACT

The insurance sector has undergone significant changes in risk regulation in recent decades. This paper examines how risk-based capital regulation impacts the evolution of insurance product markets. Risk regulation affects insurance product markets through both supply, from insurers adjusting, and demand sides, from households limiting purchases from high risk insurers. We exploit a natural experiment, the adoption of risk-based regulation in the UK, to distinguish between supply and demand effects. We do so exploiting a first-of-a-kind granular database derived from regulatory stress tests detailing insurers' risk exposures across key factors. We show that the insurance sector is increasingly moving away from its traditional role of insuring against a range of different risks to merely serving as a pass-through for investments into mutual funds. We provide causal estimates of the shift in insurers' product composition and market concentration. Furthermore, we explore how differences in regulatory environments across countries contribute to variations in insurance portfolios, suggesting that stricter regulations correlate with reduced ownership of traditional insurance products, particularly among lower-income individuals. This research underscores the complex interplay between regulatory frameworks and the insurance market landscape.

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