Systemic Risk in Financial Markets: How Systemically Important Are Insurers?

• Author: Christoph Kaserer,Christian Klein
• DOI: http://doi.org/10.1111/jori.12236
• Date: 01 September 2019
• Published date: 01 September 2019

©2017 The Journal of Risk and Insurance. Vol.XX, No. XX, 1–31 (2017).

DOI: 10.1111/jori.12236

Systemic Risk in Financial Markets: How

Systemically Important Are Insurers?

Christoph Kaserer

Christian Klein

Abstract

This study investigates how insurers contribute to systemic risk in the global

financial system. In a modeling framework embracing publicly traded and

nonpublic firms, the financial system is represented by 201 major banks and

insurers over the period from 2004 through 2014. In the aggregate, the insur-

ance sector contributes relatively little to systemic losses; during the financial

crisis and the European sovereign debt crisis, its risk share averaged 9 per-

cent. Individually,however, several multi-line and life insurers appear to be

as systemically risky as the riskiest banks. Our results, therefore, affirm that

some insurers are systemically important and indicate that insurers’ level of

systemic risk varies by line of business. We discuss several important impli-

cations of our results for managing systemic risk in insurance, arguing for a

combination of entity- and activity-based regulation.

Introduction

Insurers experienced distress in the financial crisis of 2007–2009; however, their sta-

tus as systemically important financial institutions is disputed. During the crisis, the

insurance company American International Group (AIG) was brought to the brink

of failure by severe losses in its financial markets businesses. The firm’s ultimate

rescue from bankruptcy illustrates the fact that an insurer’s default may have such

powerful repercussions for the wider financial system that it provokesgovernment in-

terventions (Harrington, 2009). More recently, supervisors have feared that European

life insurers are prone to fail en masse in a double-hit scenario involving sustained

Christoph Kaserer and Christian Klein are at the Chair of Financial Management and Capital

Markets, Technical University of Munich, Arcisstraße 21, 80333 Munich, Germany. Kaserer

can be contacted via e-mail: christoph.kaserer@tum.de. Klein can be contacted via e-mail:

c.u.klein@tum.de. We thank Keith Crocker (the editor), an anonymous co-editor, two anony-

mous referees, ViralAcharya, Robert Engle, Hans Peter Grüner, Iftekhar Hasan, Samuele Murt-

inu, and conference and seminar participants at the 16th Annual Bank Research Conference,

the 2016 Portsmouth-Fordham Conference on Banking & Finance, the 7th CEQURA Confer-

ence on Advances in Financial and Insurance Risk Management, the 2016 MBF Conference, the

University of Mannheim, and the Technical University of Munich for helpful comments and

suggestions. Part of this study was completed while Christian Klein held a visiting position

at the New York University Stern School of Business. Christian Klein gratefully acknowledges

funding support from the Deutsche Bundesbank and the European Union.

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low interest rates compounded by a sudden decline in asset prices. Under this sce-

nario, widespread loss of trust in financial institutions could easily ensue (European

Systemic Risk Board, 2015).

In the aftermath of the financial crisis, regulators set out to identify global systemi-

cally important financial institutions (G-SIFIs) and subject them to closer regulatory

scrutiny.1Aspart of this general initiative, following the designation of global system-

ically important banks (G-SIBs), the Financial Stability Board (FSB) and the Internati-

onal Association of Insurance Supervisors (IAIS) embarked on a joint effort to identify

and regulate global systemically important insurers (G-SIIs). In July 2013, the FSB

first published a list of systemically important insurers based on an initial assessment

methodology developed by the IAIS. This list is subject to annual review,and the des-

ignated insurers are required to comply with a range of additional policy measures,

including increased group-wide supervision, group-wide recovery and resolution

planning, and higher loss absorbency requirements.2

Although policy measures for systemically important insurers are now being phased

in, much controversy still exists about whether the insurance sector poses a systemic

risk and, if so, how this risk should be measured and how systemically important in-

surers should be regulated.Industry representatives have argued that overall, insurers

enhance financial stability rather than pose a systemic risk (Kessler, 2014). Previous

research has criticized the regulatoryassessment methodology (Weiß and M ¨

uhlnickel,

2014; Bierth, Irresberger,and Weiß, 2015), and researchers have arguedthat a systemic

risk regulator for insurance companies would erode market discipline (Harrington,

2009). The future status of today’s G-SIIs is meanwhile uncertain, as MetLife has suc-

cessfully challenged its systemic risk label assigned by U.S. regulators in court. As

noted by the IAIS (2011), systemic risk in insurance ultimately needs to be judged on

empirical grounds. Surprisingly, despite its pivotal role in the regulation of financial

markets, empirical evidence on the subject remains relatively limited.

Against this background, we set out to contribute to better-informed regulation of

systemic risk via an empirical assessment of insurers’ systemic importance. Wemodel

the global insurance sector in the context of the global financial system and analyze

systemic risk in insurance relative to systemic risk in banking. Our sample is a set

of 201 financial institutions over the period from January 2004 through December

2014. The sample includes 147 banks and 54 insurers, which account for almost half

of the global banking and insurance assets and almost all G-SIFIs. In our analysis, we

address two main questions: First, what contribution does the insurance sector make

to the aggregate level of systemic risk in the global financial system? Second, to what

degree are individual insurers systemically important?

1G-SIFIs are defined as “institutions of such size, market importance, and global interconnect-

edness that their distress or failure would cause significant dislocation in the global financial

system and adverse economic consequences across a range of countries” (FSB, 2010, p. 2).

2The initial list of systemically important insurers published in July 2013 included Allianz, AIG,

Assicurazioni Generali, Aviva, AXA, MetLife, Ping An, Prudential Financial, and Prudential.

The November 2014 update left the G-SII list unchanged. In November 2015, Aegon replaced

Assicurazioni Generali. Reinsurers were not included in the underlying assessments.

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