Systemic Risk and The U.S. Insurance Sector

Cummins, J. David; Weiss, Mary A.

doi:10.1111/jori.12039

Cited by 159 publications

(99 citation statements)

References 20 publications

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“…As described in Section 3.4, an institution is classified as significantly systemically important This finding corresponds to the results of Billio et al (2010) and Adrian and Brunnermeier (2014). However, it is in contrast with the results of Cummins and Weiss (2014), who argue that systemic risk within the insurance industry is considerably smaller than between insurance and banking industry. Still, similar to Chen et al (2013) we find that the Aggregate Excess CoSP triggered by systemically important banks with respect to the insurance market is slightly larger than vice versa.…”

Section: Empirical Findingscontrasting

confidence: 54%

Systemic Risk: Time-Lags and Persistence

Kubitza

2016

SSRN Journal

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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

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Section: Empirical Findingscontrasting

confidence: 54%

Systemic Risk: Time-Lags and Persistence

Kubitza

2016

SSRN Journal

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“…6 Bartram et al (2011) show in their empirical study that the use of financial derivatives significantly reduces both total risk and systematic risk of industrial firms. Although the use of derivatives for hedging purposes is usually associated with a decrease in firm risk, excessive derivatives trading by insurers has nevertheless been cited as a major source of systemic risk during the financial crisis (see Cummins and Weiss, 2010). 4 crisis in 1998 is revealed to be an economically significant predictor of the performance during the financial crisis. In a related study, Aebi et al (2012) show that the performance of banks during the financial crisis was driven partially by the quality of the banks' risk governance.…”

Section: Introductionmentioning

confidence: 99%

“…There exists a wide consensus among economists and regulators that the dependence of certain banks and insurers on short-term funding exposed these institutions to liquidity risks during the financial crisis and ultimately led to significant systemic risks (see Brunnermeier and Pedersen, 2009;Cummins and Weiss, 2010;Fahlenbrach et al, 2012). Consequently, the IAIS has included the ratio of the absolute sum of short-term borrowing and total assets in its methodology as a key indicator of systemic relevance.…”

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confidence: 99%

Why do some insurers become systemically relevant?

Weiß

Mühlnickel

2014

Journal of Financial Stability

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Are some insurers relevant for the stability of the financial system? And if yes, what firm fundamentals and aspects of insurers' business models cause them to destabilize an entire financial sector? We find that several insurers did indeed contribute significantly to the instability of the U.S. financial sector during the recent financial crisis. We empirically confirm that insurers that were most exposed to systemic risk were larger, relied more heavily on non-policyholder liabilities and had higher ratios of investment income to net revenues on average. Contrary to current conjectures of insurance regulators, we find that the contribution of insurers to systemic risk is only driven by insurer size.

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“…In contrast, cancelling an insurance contract is fraught with considerable cost, making an insurance run a very unlikely event. For this reason alone, insurers constitute much less of a 'systemic risk' than do banks (Cummins and Weiss, 2011). Moreover, insurers provide protection against risk but do not provide liquidity as do banks.…”

Section: Contribution Of the Present Papermentioning

confidence: 99%

Solvency Regulation of Banks and Insurers: A Two-Pronged Critique

Zweifel

2015

International Journal of Financial Research

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This paper puts forth two models, one of a bank and one of an insurer. Their divisions responsible for investment (and risk underwriting, respectively) seek to maximize the expected risk-adjusted rate of return on capital (RAROC). For the bank, higher solvency lowers the cost of refinancing; for the insurer, it attracts more premium income. In both cases, however, higher solvency ties costly capital. Sequential decision making is tracked over three periods. In period 1, exogenous changes in expected returns and in volatility occur, each suggesting optimal adjustments in solvency. However, there can be only one adjustment, which in period 3 creates an endogenous trade-off between expected returns and volatility. This tradeoff is shown to involve parameters that differ between banks and insurers, calling for bank-specific and insurance-specific solvency regulation. In addition, Basel I and II (Solvency I and II, respectively) are shown to modify this tradeoff, inducing senior management of both banks and insurers to opt for higher volatility and lower solvency than otherwise. Therefore, existing solvency regulation can run counter their stated objective in both cases, which quite likely is also true of Basel III and Solvency III.

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Systemic Risk and The U.S. Insurance Sector

Cited by 159 publications

References 20 publications

Systemic Risk: Time-Lags and Persistence

Systemic Risk: Time-Lags and Persistence

Why do some insurers become systemically relevant?

Solvency Regulation of Banks and Insurers: A Two-Pronged Critique

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