Systemic risk of insurers around the globe

Abstract

We study the exposure and contribution of 253 international life and non-life insurers to systemic risk between 2000 and 2012. For our full sample period, we find systemic risk in the international insurance sector to be small. In contrast, the contribution of insurers to the fragility of the financial system peaked during the recent financial crisis. In our panel regressions, we find the interconnectedness of large insurers with the insurance sector to be a significant driver of the insurers' exposure to systemic risk. In contrast, the contribution of insurers to systemic risk appears to be primarily driven by the insurers' leverage.

Insurance Activities and Systemic Risk

“…38 We neglect Price-to-book, Leverage and Size not because we neglect their importance, but because they have been substantially analyzed in previous work, see for instance Brunnermeier et al (2012) for banks and (Bierth et al, 2015) for insurers.…”

“…However, they argue that when applying a linear and non-linear Granger causality test to the same series corrected for heteroskedasticity, banks tend to cause more systemic risk and for longer periods of time then insurance companies. Weiß and Mühlnickel (2014) and Bierth et al (2015) focus directly on the link between equity-based systemic risk measures and industry-specific fundamentals. Weiß and Mühlnickel (2014) estimate the systemic risk contribution based on ∆CoVaR and MES for a sample of U.S. insurers during the 2007-2008 crisis, inferring that insurers that were most exposed to systemic risk were on average larger, relied more heavily on non-policyholder liabilities and had higher ratios of investment income to net revenues.…”

“…Weiß and Mühlnickel (2014) estimate the systemic risk contribution based on ∆CoVaR and MES for a sample of U.S. insurers during the 2007-2008 crisis, inferring that insurers that were most exposed to systemic risk were on average larger, relied more heavily on non-policyholder liabilities and had higher ratios of investment income to net revenues. Bierth et al (2015) analyze a much broader sample of insurers over a longer time horizon and find that the systemic risk contribution of the insurance sector is relatively small. However, they also argue that the contribution of insurers to systemic risk peaked during the 2007-2008 financial crisis and find that the interconnectedness of large insurers with the insurance industry is a significant driver of the insurers exposure to systemic risk.…”

Insurance Activities and Systemic Risk

“…However, they argue that when applying a linear and non-linear Granger causality test to the same series corrected for heteroskedasticity, banks tend to cause more systemic risk and for longer periods of time then insurance companies. Weiß and Mühlnickel (2014) and Bierth et al (2015) focus directly on the link between equity-based systemic risk measures and industry-specific fundamentals. Weiß and Mühlnickel (2014) estimate the systemic risk contribution based on ∆CoVaR and MES for a sample of U.S. insurers during the 2007-2008 crisis, inferring that insurers that were most exposed to systemic risk were on average larger, relied more heavily on non-policyholder liabilities and had higher ratios of investment income to net 6 A comprehensive review of the models applied to systemic risk is provided by Bisias et al (2012).…”

“…Bierth et al (2015) analyze a much broader sample of insurers over a longer time horizon and find that the systemic risk contribution of the insurance sector is relatively small. However, they also argue that the contribution of insurers to systemic risk peaked during the 2007-2008 financial crisis and find that the interconnectedness of large insurers with the insurance industry is a significant driver of the insurers exposure to systemic risk.…”