Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Non-Technical SummaryThe current loose monetary policy conducted by many central banks worldwide is resulting in extraordinarily low interest rates, especially on sovereign bonds. Life insurers typically allocate a large part of their portfolios in sovereign bonds, and therefore a generalized decrease in interest rates directly affects the rate of return of their portfolios. Moreover, typical life insurance products in Europe are sold with a long-term minimum return guarantee, which is set at the inception of the contract and remains unchanged until redemption. Such contracts usually have maturities above 20 or 30 years which implies that life insurers still hold in their underwriting portfolio contracts sold in the past when bond markets yielded a relatively higher rate of return. In addition, the duration of the liability side is typically higher than the duration of the asset side. Therefore, under a market consistent valuation of assets and liabilities, i.e. under the incoming Solvency II regulation, the current level of interest rates increases the present value of current liabilities more than the present value of assets. This in turn reduces the market value of equity capital with detrimental effects on the solvency position of the insurance company.The German life insurance industry is particularly exposed to such an environment: on the one hand yields on German sovereign bonds are at historical low level, and on the other hand life insurance products sold in the past in the German market, guarantee on average a relatively high yearly rate of return. 1 Thus, in our paper we present a balance sheet model of a stylized German life insurer and project it 10 years ahead under different (stochastic) capital market settings and with different initial capital endowments. We distinguish between the book value balance sheet subject to German GAAP, and the market value balance sheet subject to Solvency II capital requirements. The former is used as basis for the profit participation mechanism typical of life insurance contracts, whereas the latter is used to determine the solvency position of the life insurer.The results of our simulations suggest that i) should interest rates remain at the current level, the solvency ratio of a large portion of German life insurers would be considerably reduced with a considerable increase in the probability of default starting by 2017; ii) under a more severe interest rate scenario, the solv...
European sovereign debt crisis, the concept of systemic risk has become increasingly relevant. After the collapse of Lehman Brothers in particular, the debate on systemic risk has been primarily focused on banks. However, recent empirical evidence suggests that institutions not traditionally associated with systemic risk, such as insurance companies, also play a prominent role in posing systemic risk. Thus in the present paper we investigate the relative systemic risk contribution of insurance companies vis-à-vis other industries and the determinants of systemic risk within the insurance industry. In the first part of the analysis, we conduct an aggregated industry analysis based on 3 measures of systemic risk, namely CoVaR, DMES and the linear Granger causality test, on 3 groups, namely insurers, banks and non-financials. In the second part of the analysis, we investigate the relation between the systemic risk contribution and different balance sheet positions and proxies.Our evidence suggests that in the aftermath of the recent crises financial institutions tend to cause more systemic risk than non-financial institutions; among financial institutions, banks pose more systemic risk than insurers, especially after the Lehman bankruptcy. Insurers do cause systemic risk, especially when they engage in non-insurance activities, e.g. banking activities. Furthermore, we find that systemic risk in the insurance industry is mainly driven by the liability side, i.e. the capital structure rather than the asset side. However, on the asset side we find that the level of diversification is also a strong determinant of systemic risk, although further investigation is needed. In addition, traditional variables associated with systemic risk in financial institutions, such as size is of importance, whereas price-to-book and leverage seem to play a counterintuitive role. This is however in line with previous findings, which confirm for instance that leverage in insurance is fundamentally different compared to leverage in banking. Results are robust to a set of different specifications, different panels and different econometric methods. Finally, the choice of the time span should shelter the analysis from biases stemming from sample (time-dependency) selection.In this paper, we provide new evidence on the role of insurers in posing systemic risk, in particular on the role of insurance activities compared to non-insurance activities. Also, we are among the first to provide empirical evidence on the role of diversification in posing systemic risk, which should be further analyzed in future research. Moreover, we are the first to use a European set of companies and to use variables of stock rather than flow: the latter is particularly relevant to show how the stock of the outstanding business drives systemic risk contribution in the insurance industry.Concluding, our research has the potential to provide a significant contribution to shedding additional light on the debate on systemic risk in the insurance industry as well as insig...
Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractThis paper investigates systemic risk in the insurance industry. We first analyze the systemic contribution of the insurance industry vis-à-vis other industries by applying 3 measures, namely the linear Granger causality test, conditional value at risk and marginal expected shortfall, on 3 groups, namely banks, insurers and non-financial companies listed in Europe over the last 14 years. We then analyze the determinants of the systemic risk contribution within the insurance industry by using balance sheet level data in a broader sample. Our evidence suggests that i) the insurance industry shows a persistent systemic relevance over time and plays a subordinate role in causing systemic risk compared to banks, and that ii) within the industry, those insurers which engage more in non-insurance-related activities tend to pose more systemic risk. In addition, we are among the first to provide empirical evidence on the role of diversification as potential determinant of systemic risk in the insurance industry. Finally, we confirm that size is also a significant driver of systemic risk, whereas price-to-book ratio and leverage display counterintuitive results.
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