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Shadow banking - often defined as financial intermediation that provides maturity transformation outside of the formal confines of a bank'-played a central role in causing the 2008 financial crisis. For this reason, a 2013 report of the New York Department of Financial Services generated substantial controversy when it labeled some life insurers' practices of reinsuring insurance policies with affiliated captive insurers as "shadow insurance." Yet the moniker of shadow insurance was not without at least some justification. Like shadow banking, life insurers' reinsurance of policies with affiliated captives is a form of regulatory arbitrage that moves traditional insurance risks from insurers' balance sheets to the balance sheets of entities subject to more limited regulatory restrictions and scrutiny.

Since New York's 2013 report, numerous policymakers- including both the Federal Insurance Office and the Financial Stability Oversight Council-have expressed concern regarding shadow insurance. Meanwhile, an important empirical study has documented the staggering growth of shadow insurance, from $11 billion in ceded liabilities in 2002 to $364 billion in ceded liabilities in 2012.7 The study also concluded that, under plausible assumptions, the average insurer utilizing shadow insurance would experience a 53 percentage point reduction in risk-based capital and a 350% increase in default probability if the underlying transactions were reversed.