Insurance, Systemic Risk and the Financial Crisis

Abstract

In this paper we assess the impact of the financial crisis on insurance markets and the role of the insurance industry in the crisis itself. We examine some previous "insurance crises" and consider the effect of the crisis on insurance risk-the liabilities arising from contracts that insurers underwrite. We then analyse the effects of the crisis on the performance of insurers in different markets and assess the extent of systemic risk in insurance. We conclude that, while systemic risk remains lower in insurance than in the banking sector, it is not negligible and has grown in recent years, partly as a consequence of insurers' increasing links with banks and their recent focus on non-(traditional) insurance activities, including structured finance. We conclude by considering the structural changes in the insurance industry that are likely to result from the crisis, including possible effects on "bancassurance" activity, and offer some thoughts on changes in the regulation of insurance markets that might ensue.

The European Insurance Industry: A PEST Analysis

“…However, since insurers have increased their connections with banks and with other non-traditional insurance activities (mainly in capital markets) over the past two decades, it has been seen that systemic risk has seeped into the insurance industry and this trend is expected to continue. Both entities have increased their non-traditional activities (through diversification) and became a member of each other's markets, which in turn has created a systemic link between banks and insurers and also altered their separate business models making it almost impossible to go back to the traditional models (Baluch et al 2011). Notwithstanding, a decreased demand for bancassurance has been experienced due to it being sensitive to market dislocations including organisational and managerial complexities (Liedtke and Schanz 2010).…”

“…Furthermore, given that this class of business is long tail, any results from the 2008 credit crunch and financial crisis will probably remain unknown for many years (Baluch et al 2011).…”

“…Post crisis the insurance industry resumed growth in line with the global financial market (Liedtke and Schanz 2010), mainly because investors had understood that the effect on the insurance industry was less severe (Baluch et al 2011).…”

“…Following the crisis, it was firstly expected that more mergers and acquisitions would be seen in the market, where large insurance entities, who survived the crisis, would target smaller entities that were weakened (Baluch et al 2011). More recently new international regulations set by the Financial Stability Board have placed some companies as systemically important financial institutions (Sifis) which adds significant oversight at a huge cost.…”

Analysing the Determinants of Credit Risk for General Insurance Firms in the UK

“…Also, investment in assetbacked securities has increased. As a result, as pointed out by Baluch et al (2011), insurance firms have become more vulnerable during crises. This is also shown by studies such as those by Das et al, (2003), who find that linkages through reinsurance activities may cause several primary insurance firms to fail at the same time, and by Acharya et al (2015), who suggest that large insurance firms are more likely to invest in high-risk assets because they are correlated with different financial institutions.…”