Why do some insurers become systemically relevant?

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.

Section: Literature Reviewmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

See 1 more Smart Citation

Insurance Activities and Systemic Risk

Berdin

Sottocornolay

2015

“…This view is also supported by the econometric analysis of Acharya et al (2010), but it is not generally agreed on. In particular, Billio et al (2010) and Adrian and Brunnermeier (2014) find that the systemic risk in the insurance sector is generally not smaller than in the banking sector, whereas Weiß and Mühlnickel (2014) conclude that the systemic risk triggered by insurance institutions is mainly driven by the insurer's size. Clearly, the specific systemic role of insurance institutions is still not clear and is causing controversial discussions between academics, regulators and insurance institutions.…”

Section: Introductionmentioning

confidence: 98%

Systemic Risk: Time-Lags and Persistence

Kubitza

2016

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 AbstractCommon systemic risk measures focus on the instantaneous occurrence of triggering and systemic events. However, systemic events may also occur with a time-lag to the triggering event. To study this contagion period and the resulting persistence of institutions' systemic risk we develop and employ the Conditional Shortfall Probability (CoSP), which is the likelihood that a systemic market event occurs with a specific time-lag to the triggering event. Based on CoSP we propose two aggregate systemic risk measures, namely the Aggregate Excess CoSP and the CoSP-weighted time-lag, that reflect the systemic risk aggregated over time and average time-lag of an institution's triggering event, respectively.Our empirical results show that 15% of the financial companies in our sample are significantly systemically important with respect to the financial sector, while 27% of the financial companies are significantly systemically important with respect to the American non-financial sector. Still, the aggregate systemic risk of systemically important institutions is larger with respect to the financial market than with respect to non-financial markets. Moreover, the aggregate systemic risk of insurance companies is similar to the systemic risk of banks, while insurers are also exposed to the largest aggregate systemic risk among the financial sector.Keywords: Contagion Period, Spillover Effects, Systemic Risk, Financial Crisis, Financial Markets JEL Classification: G01, G14, G15, G20 * We are grateful for helpful comments and suggestions by Elia Berdin, Mario Brandtner, Wolfgang Kürsten and Christian Pigorsch. Any errors are our own.§ Both authors are affiliated with the

“…Billio et al (2012) and Weiß and Mühlnickel (2014)). This is partially in contrast to other authors, who do not find evidence of systemic relevance for the industry as a whole (e.g.…”

Section: Introductionmentioning

confidence: 98%

Insurance Activities and Systemic Risk

Berdin

Sottocornola

2015

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...