Regulatory capital and portfolio investments : evidence from life insurance companies

This dissertation examines how capital requirements affect financial institutions' portfolio investments by studying life insurers’ portfolio and business decisions. Through a simple model, I show that when regulatory capital becomes cheaper, life insurers reduce the average investment risk of their portfolios and increase the scale of their insurance business. I test the model using a panel data set of U.S. life insurers and staggered changes in state laws on financial reinsurance that enable the insurers to raise capital more easily. I find that, after these law changes, the insurers significantly reduce their allocation to risky investments and accelerate their annual insurance underwriting growth on average. The effect is more pronounced for insurers that are smaller and less financially competitive.