Systemic Risk Bibliography
Temple University
Advanta Center for Research on Financial Institutions1
July 2014
Note to users: This bibliography is provided for the benefit of insurance, risk management,
financial, and actuarial researchers. The bibliography focuses primarily on references relating
systemic risk to the insurance industry. Users are advised that there is a large literature focusing
on systemic risk in banking and other financial industries. Only a few papers that focus
exclusively on non-insurance industries are included here. Such papers that are included are
those that are frequently cited in the insurance-related literature on systemic risk. The
bibliography also focuses primarily on rigorous research papers, i.e., articles in the business or
trade press are not included. There is also a literature on systemic weather risk and crop
insurance that is not covered here. During the coming months, the bibliography will be updated
to include abstracts and, where possible, links to websites where papers are available. Links
cannot be provided to most published articles due to copyright restrictions. Comments and
suggestions are welcome. Any comments should be sent via email to cummins@temple.edu.
Bibliography
Acemoglu, D., A. Ozdaglar and A. Tahbaz-Salehi, 2013, “Systemic Risk and Stability in
Financial Networks,” Working Paper No. 18727, National Bureau of Economic Research,
Cambridge, MA, USA.
http://www.columbia.edu/~at2761/Contagion.pdf
Abstract:
We provide a framework for studying the relationship between the financial network architecture
and the likelihood of systemic failures due to contagion of counterparty risk. We show that
financial contagion exhibits a form of phase transition as the extent of interbank
interconnectivity increases: as long as the magnitude and the number of negative shocks
affecting financial institutions are sufficiently small, a more equal distribution of interbank
obligations enhances the stability of the system. However, beyond a certain point, such dense
interconnections start to serve as a mechanism for the propagation of shocks and lead to a more
fragile financial system.
Our results thus highlight the “robust-yet-fragile” nature of financial networks: the same features
that make the system more resilient under certain conditions may function as significant sources
of systemic risk and instability under another.
Acharya, Viral V, John Biggs, Matthew Richardson, and Stephen Ryan, 2009, “On the
Financial Regulation of Insurance Companies,” working paper, NYU Stern School of
Business, New York.
1
The Advanta Center gratefully acknowledges the financial support of the Society of Actuaries through the Center
for Actuarial Excellence Research Grants program.
1
http://web-docs.stern.nyu.edu/salomon/docs/whitepaper.pdf
Acharya, Viral V, John Biggs, Matthew Richardson, and Stephen Ryan, 2011, “Systemic
risk and the regulation of insurance companies,” in V. V. Acharya, T. F. Cooley, M.
Richardson, and I. Walter, eds., Regulating Wall Street—The Dodd-Frank Act and the
New Architecture of Global Finance (New York: John Wiley), pp. 241–301.
http://onlinelibrary.wiley.com/doi/10.1002/9781118258231.ch9/summary
Summary:
This chapter contains sections titled:
-Existing Structure and Regulation of the U.S. Insurance Industry;
-The Dodd-Frank Wall Street Reform and Consumer Protection Act in Relation to Insurance
Regulation;
-Evaluation of Stipulations about Insurance Regulation and Recommendations for Reform;
-Regulation of Insurance Companies' Systemic Risk;
-The Importance of Federal Regulation for Insurance Companies;
-Insurance Accounting;
-Summary;
-Appendix A: The Case of AIG;
-Appendix B: Systemic Risk Measurement: An Example;
-Notes;
-References.
Acharya, Viral V., Lasse H. Pedersen, Thomas Philippon, and Matthew Richardson, 2010,
“Measuring Systemic Risk,” working paper, Federal Reserve Bank of Cleveland,
Cleveland, OH.
http://www.tcmb.gov.tr/yeni/konferans/Pedersen.pdf
Abstract:
We present a simple model of systemic risk and we show that each financial institution's
contribution to systemic risk can be measured as its systemic expected shortfall (SES), i.e., its
propensity to be undercapitalized when the system as a whole is undercapitalized. SES increases
with the institution's leverage and with its expected loss in the tail of the system's loss
distribution. Institutions internalize their externality if they are taxed" based on their SES. We
demonstrate empirically the ability of SES to predict emerging risks during the financial crisis of
2007-2009, in particular, (i) the outcome of stress tests performed by regulators; (ii) the decline
in equity valuations of large financial firms in the crisis; and, (iii) the widening of their credit
default swap spreads.
Acharya, Viral V., Robert Engle, and Matthew Richardson, 2010, “Capital Shortfall: A
New Approach to Ranking and Regulating Systemic Risks,” American Economic Review
102: 59-64,
http://vlab.stern.nyu.edu/public/static/capital_shortfall-2012.pdf
Abstract:
The financial crisis of 2007‐ 2009 has given way to the sovereign debt crisis of 2010‐ 2012, yet
many of the banking issues remain the same. We discuss a method to estimate the capital that a
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financial firm would need to raise if we have another financial crisis. This measure of capital
shortfall is based on publicly available information but is conceptually similar to the stress tests
conducted by US and European regulators. We argue that this measure summarizes the major
characteristics of systemic risk and provides a reliable interpretation of the past and current
financial crisis.
Acharya, Viral V. and Matthew Richardson, 2014, “Is the Insurance Industry Systemically
Risky?” in John H. Biggs and Matthew Richardson,eds., Modernizing Insurance Regulation
(New York: John Wiley).
Adrian, Tobias and Markus K. Brunnermeier, 2011, “CoVaR,” Working Paper 17454,
National Bureau of Economic Research, Cambridge, MA.
http://www.princeton.edu/~markus/research/papers/CoVaR
Abstract:
We propose a measure for systemic risk: CoVaR, the value at risk (VaR) of the financial system
conditional on institutions being under distress. We define an institution’s contribution to
systemic risk as the difference between CoVaR conditional on the institution being under distress
and the CoVaR in the median state of the institution. From our estimates of CoVaR for the
universe of publicly traded financial institutions, we quantify the extent to which characteristics
such as leverage, size, and maturity mismatch predict systemic risk contribution. We also
provide out of sample forecasts of a countercyclical, forward looking measure of systemic risk
and show that the 2006Q4 value of this measure would have predicted more than half of realized
covariance during the financial crisis.
Ahern, K. R. and J. Harford, 2014, “The importance of Industry Links in Merger Waves,”
Journal of Finance, forthcoming.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1522203
Abstract:
We represent the economy as a network of industries connected through customer and supplier
trade flows. Using this network topology, we find that stronger product market connections lead
to a greater incidence of cross-industry mergers. Second, mergers propagate in waves across the
network through customer-supplier links. Merger activity transmits to close industries quickly
and to distant industries with a delay. Finally, economy-wide merger waves are driven by merger
activity in industries that are centrally located in the product market network. Overall, we show
that the network of real economic transactions helps to explain the formation and propagation of
merger waves.
Al-Darwish, A., Hafeman, M., Impavido, G., Kemp, M., and O’Malley, P. (2011) Possible
unintended consequences of Basel III and Solvency II, working paper, IMF Working
Paper WP/11/187, International Monetary Fund (Washington, DC).
https://www.imf.org/external/pubs/ft/wp/2011/wp11187.pdf
Abstract:
3
In today’s financial system, complex financial institutions are connected through an opaque
network of financial exposures. These connections contribute to financial deepening and greater
savings allocation efficiency, but are also unstable channels of contagion. Basel III and Solvency
II should improve the stability of these connections, but could have unintended consequences for
cost of capital, funding patterns, interconnectedness, and risk migration.
Allen, Franklin and Ana Babus, 2009, “Networks in finance,” in P, Kleindorfer and J.
Wind (Eds.), Network-based Strategies and Competencies, 367-382, Wharton School
Publishing.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1094883
Abstract:
Modern financial systems exhibit a high degree of interdependence. There are different possible
sources of connections between financial institutions, stemming from both the asset and the
liability side of their balance sheet. For instance, banks are directly connected through mutual
exposures acquired on the interbank market. Likewise, holding similar portfolios or sharing the
same mass of depositors creates indirect linkages between financial institutions. Broadly
understood as a collection of nodes and links between nodes, networks can be a useful
representation of financial systems. By providing means to model the specifics of economic
interactions, network analysis can better explain certain economic phenomena. In this paper we
argue that the use of network theories can enrich our understanding of financial systems. We
review the recent developments in financial networks, highlighting the synergies created from
applying network theory to answer financial questions. Further, we propose several directions of
research. First, we consider the issue of systemic risk. In this context, two questions arise: how
resilient financial networks are to contagion, and how financial institutions form connections
when exposed to the risk of contagion. The second issue we consider is how network theory can
be used to explain freezes in the interbank market of the type we have observed in August 2007
and subsequently. The third issue is how social networks can improve investment decisions and
corporate governance. Recent empirical work has provided some interesting results in this
regard. The fourth issue concerns the role of networks in distributing primary issues of securities
as, for example, in initial public offerings, or seasoned debt and equity issues. Finally, we
consider the role of networks as a form of mutual monitoring as in microfinance.
Allen, Franklin and Douglas Gale, 2000, “Financial contagion,” Journal of Political
Economy, 108,1, 1-33.
http://www.econ.nyu.edu/cvstarr/working/1998/RR98-33.PDF
Abstract:
Financial contagion is modeled as an equilibrium phenomenon. Because liquidity preference
shocks are imperfectly correlated across regions, banks hold interregional claims on other banks
to provide insurance against liquidity preference shocks. When there is no aggregate uncertainty,
the first-best allocation of risk sharing can be achieved. However, this arrangement is financially
fragile. A small liquidity preference shock in one region can spread by contagion throughout the
economy. The possibility of contagion depends strongly on the completeness of the structure of
interregional claims. Complete claims structures are shown to be more robust than incomplete
structures.
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Allen, Linda and Julapa Jagtiani, 2000, “The Risk Effects of Combining Banking,
Securities, and Insurance Activities,” Journal of Economics and Business 52: 485-497.
http://www.sciencedirect.com/science/article/pii/S0148619500000333
A.M. Best Company, 2010a, Global Reinsurance: 2009 Financial Review, Special Report,
April 12 (Oldwick, NJ).
A.M. Best Company, 2010b, U.S. Banking Regulatory Review: Financial Reform Legislation
Leaves Much Unresolved on Systemic Risk, Special Report, August 9 (Oldwick, NJ).
A.M. Best Company, 2010c, U.S. Life/Health – 1976-2009 Impairment Review, Special
Report, July 19 (Oldwick, NJ).
A.M. Best Company, 2010d, U.S. Property/Casualty –1969-2009 Impairment Review,
Special Report, June 21(Oldwick, NJ).
A.M. Best Company, 2010e, U.S. Life/Health – 2009 Financial Results, Statistical Study,
March 29 (Oldwick, NJ).
A.M. Best Company, 2011a, U.S. Life/Health – 1976-2010 Impairment Review (Oldwick,
NJ).
A.M. Best Company, 2011b, U.S. Property/Casualty –1969-2009 P/C Impairment Review
(Oldwick, NJ).
A.M. Best Company, 2011c, U.S. Life/Health – 2010 Financial Results (Oldwick, NJ).
A.M. Best Company, 2011d, U.S. Property/Casualty – 2010 Financial Results (Oldwick, NJ).
A.M. Best Company, 2012a, Best’s Aggregates and Averages: Life/Health – 2012 Edition
(Oldwick, NJ).
A.M. Best Company, 2012b, Best’s Aggregates and Averages: Property/Casualty – 2012
Edition (Oldwick, NJ).
A.M. Best Company, 2012c, U.S. Life/Health – 1969-2011 Impairment Review (Oldwick,
NJ).
A.M. Best Company, 2012d, U.S. Property/Casualty –1969-2011 P/C Impairment Review
(Oldwick, NJ).
http://www.ambest.com/
American International Group, 2009, AIG: Is the Risk Systemic? (New York).
http://www.tavakolistructuredfinance.com/AIGS.pdf
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Ashby, S., 2011, “Risk Management and the Global Banking Crisis: Lessons for Insurance
Solvency Regulation,” Geneva Papers on Risk and Insurance – Issues and Practice 36: 330–
347.
http://www.palgrave-journals.com/gpp/journal/v36/n3/full/gpp201110a.html
Abstract:
This paper investigates the causes of the banking crisis and the resulting lessons that need to be
learned for insurance regulation. The paper argues that the banking crisis was predominantly
caused by weaknesses in the management and regulation of banks, weaknesses that lead to
problems such as flawed compensation schemes, poor risk management communication and an
over-reliance on mathematical risk models. On the basis of these findings, doubts are expressed
about the direction of certain insurance regulatory reforms—such as the focus on capital
requirements and quantitative risk assessment (the so-called “Pillar I” of most reforms). It is also
recommended that a more balanced approach to insurance regulation should be implemented,
which places much greater emphasis on enhancing risk management guidance and supervisory
tools (Pillar II) and improving disclosure rules (Pillar III).
Ayadi, Rym, 2007, “Solvency II: A Revolution for Regulating European Insurance and
Reinsurance Companies,” Journal of Insurance Regulation 26: 11-35.
Abstract:
Substantial progress has been made in the Financial Services Action Plan (FSAP) since its
adoption in 1999, in its efforts to fulfil its three strategic objectives: completing a single
wholesale market by the progressive removal of outstanding barriers to an integrated financial
services market; developing an open and secure market for retail financial services, removing
regulatory and administrative barriers in order to help consumers; and ensuring the continued
stability of European Union (EU) financial markets by installing state-of the-art supervisory
practices in order to contain systemic or institutional risk (e.g., capital adequacy, solvency
margins for insurance) and take account of changing market realities (where institutions are
organized on a pan-European, cross-sectoral basis).
Bach, Wolfgang and Tristan Nguyen, 2012, “On the Systemic Relevance of the Insurance
Industry: Is a Macroprudential Insurance Regulation Necessary?” Journal of Applied
Finance and Banking 2: 127-149.
Abstract:
The paper examines whether there is an economic justification for a macroprudential approach to
insurance regulation based on the normative theory of regulation. First, the paper elaborates
some basic foundations, such as the characterisation of a macroprudential approach to financial
regulation as well as an explanation of the functions the insurance industry contributes to the
financial system and the real economy. Then it addresses the research question by analysing
whether the requirements are fulfilled for a normative theory-compliant macroprudential
regulatory foundation. Contrary to the prevailing opinion, the paper finds that the insurance
industry is of systemic relevance, at least in terms of the efficient functioning of the financial
system as a whole and the potential costs in case of failure or malfunction. Furthermore, it
identifies the fundamental ingredients needed for a theory-based justification of a
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macroprudential insurance regulation. The value of this paper is in clarifying terms and in
systemizing the rationales for a macroprudential regulation with respect to the insurance
industry. Both are of importance for the classification of arguments in the current political
discussion. The paper also provides the basic groundwork useful for further research on systemic
risk and macroprudential regulation.
Baluch, Faisal, Stanley Mutenga, and Chris Parsons, 2011, “Insurance, Systemic Risk, and
the Financial Crisis,” The Geneva Papers 36: 126-163.
http://www.palgrave-journals.com/gpp/journal/v36/n1/abs/gpp201040a.html
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.
Bank for International Settlements (BIS), 2003, A Glossary of Terms Used in Payments and
Settlements Systems (Basel, Switzerland).
http://www.bis.org/publ/cpss00b.pdf?noframes=1
Introduction：
Over the years, the terminology relating to payment systems has been steadily refined as
payment and settlement infrastructures have evolved and our knowledge of the complexities of
the payment process has increased. Developments in technology highlight the importance of
consistent usage of new terms, which we need to use whether or not we are technical experts. For
example, the concept of real-time processing is intrinsic to understanding the functioning of
modern payment systems and figures in discussions among users and experts. As in most
disciplines, payments terminology has also been enriched by a number of analytical studies,
which have added new concepts and terms.
To this end, the Committee on Payment and Settlement Systems (CPSS) has decided to bring
together in a single publication all the standard terms and their definitions that have been
published in the reports of the CPSS, the European Monetary Institute (EMI) and the European
Central Bank (ECB). The first glossary to be included in this collection is from the report
Delivery versus payment in securities settlement systems published in 1992. The “Red Book”
series first published in 1993 attempted to provide a standard set of definitions for commonly
used payment system terms. Since then, more terms have continually been added with the
publication of each new CPSS report. The EMI expanded the collection with the glossary of its
“Blue Book”, Payment systems in the European Union, published in 1996. These efforts are
being continued by the ECB in its successive reports on payment systems. With each additional
report, the vocabulary of payment systems continues to grow.
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This combined glossary includes terms used in all the glossaries of the CPSS and EMI/ECB
reports published to date. In some cases, identical terms have been used to explain concepts that
may have different implications depending on the context of their use. For example, “marking to
market” is defined differently in a payment system context from the way it is understood in the
context of a derivatives contract. In such cases, all the relevant definitions have been included.
The source reference given in the last column of each entry indicates the reports where the term
was defined, thus enabling the reader to refer back if necessary.
Bank for International Settlements (BIS), 2007, Triennial Central Bank Survey: Foreign
Exchange and Derivatives Markets in 2007 (Basel, Switzerland).
http://www.bis.org/publ/rpfxf07t.pdf
Baranoff, Etti, 2012, “An Analysis of the AIG Case: Understanding Systemic Risk and Its
Relation to Insurance,” Journal of Insurance Regulation 31: 243-270.
Abstract:
This study describes the AIG^sup 2^ model of operations prior to the conglomerate failure up to
the point when the liquidity crisis triggered the massive bailout by the U.S. government. It is a
study designed to provide understanding of the key factors in the demise of AIG in
relationship to
systemic
risks in insurance. The main
contribution of this
report
is the delineation of the key internal factors from the external macro market and regulatory
factors that contributed to the failure. We regard the latter as macro factors
underpinning the foundation that propelled the activities of AIG Financial Products Unit
(AIGFP). The study shows that if it were not for the "non-insurance" activities of the AIGFP
under the AIG holding company, the averted collapse (with the bailout), in all likelihood, would
have been avoided. The main key takeaways are: AIGFP was not an insurance company; AIGFP
was not regulated by state-based insurance regulations; and AIGFP's credit default swaps
were the key factor to the AIG collapse. As global regulators look into indicators for
systemically important financial institutions (SIFIs), the following macro factors should be
integrated into any newly created regulatory framework: 1) use credit ratings with care and avoid
exploitation of high ratings; 2) be aware of banks' capital being replaced by new opaque financial
products; 3) remove gaps in regulations and require transparency; 4) forbid companies to select
their own regulatory bodies; 5) understand insurance vs. non-insurance or quasi-banking
activities and products; and 6) create clarity to delineate between the banking
and insurance models. In brief, the key lesson is that when non-insurance or quasi-banking
operations enter the insurance arena, expert insurance supervision is needed to close gaps in
regulation.
Battiston, Stefano, Delli Gatti, Mauro Gallegati, Bruce Greenwald, and Joseph E. Stiglitz,
2012a, “Liaisons Dangereuses: Increasing Connectivity, Risk Sharing, and Systemic Risk,”
Journal of Economic Dynamics and Control 36: 1121-1141.
http://www.sciencedirect.com/science/article/pii/S0165188912000899
Abstract:
The recent financial crisis poses the challenge to understand how systemic risk arises
endogenously and what architecture can make the financial system more resilient to global
8
crises. This paper shows that a financial network can be most resilient for intermediate levels of
risk diversification, and not when this is maximal, as generally thought so far. This finding holds
in the presence of the financial accelerator, i.e. when negative variations in the financial
robustness of an agent tend to persist in time because they have adverse effects on the agent's
subsequent performance through the reaction of the agent's counterparties.
Battiston, Stefano, Delli Gatti, Mauro Gallegati, Bruce Greenwald, and Joseph E. Stiglitz,
2012b, “Default cascades: When does risk diversification increase stability?” Journal of
Financial Stability, 8, 138-149.
http://www.sciencedirect.com/science/article/pii/S1572308912000125
Abstract:
We explore the dynamics of default cascades in a network of credit interlink-ages in which each
agent is at the same time a borrower and a lender. When some counterparties of an agent default,
the loss she experiences amounts to her total exposure to those counterparties. A possible
conjecture in this context is that individual risk diversification across more numerous
counterparties should make also systemic defaults less likely. We show that this view is not
always true. In particular, the diversification of credit risk across many borrowers has ambiguous
effects on systemic risk in the presence of mechanisms of loss amplifications such as in the
presence of potential runs among the short-term lenders of the agents in the network.
Bell, Marian and Benno Keller, 2009, Insurance and Stability: The Reform of Insurance
Regulation (Zurich, Switzerland: Zurich Financial Services Group).
Beltratti, Andrea and Giuseppe Cornino, 2008, “Why are Insurance Companies Different?
The Limits of Convergence Among Financial Institutions,” Geneva Papers on Risk &
Insurance 33: 363-388.
http://www.palgrave-journals.com/gpp/journal/v33/n3/abs/gpp200813a.html
Abstract:
Banks and insurance companies maintain structural differences, limiting the extent of
convergence due to factors such as demographics, the structure of liabilities, the scale of
operations, regulation and accounting practices and distribution channels. Demography directly
affects the needs of consumers regarding the risks to be covered; the structure of liabilities is
important due to the limited possibilities to hedge many of them; the securitization process has
been less relevant for insurance companies than for other financial intermediaries; regulation is
different and implemented by different authorities; accounting is usually carried out on a price
basis in the banking sector and on a cost basis in the insurance sector; and distribution channels
require different expertise. A simulation model highlights the role of some of these factors and
the peculiarities of managing insurance companies.
Bernal, Oscar, Jean-Yves Gnabo, and Gregory Guilmin, 2013, “Assessing the Contribution
of Banks, Insurance and Other Financial Services to Systemic Risk,” working paper,
University of Namur, Namur, France.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2295426
9
Abstract:
The aim of this paper is to contribute to the debate on systemic risk by assessing the extent to
which distress within the main different financial sectors, namely, the banking, insurance and
other financial services industries contribute to systemic risk. To this end, we rely on the
∆CoVaR systemic risk measure introduced by Adrian and Brunnermeier (2011). In order to
provide a formal ranking of the financial sectors with respect to their contribution to systemic
risk, the original ∆CoV aR approach is extended here to include the Kolmogorov-Smirnov test
developed by Abadie (2002), based on bootstrapping. Our empirical results reveal that in the
Eurozone, for the period ranging from 2004 to 2012, the banking sector contributes relatively the
most to systemic risk at times of distress affecting this sector. By contrast, the insurance industry
is the most systemically risky financial sector in the United States for the same period. Moreover,
the three financial sectors contribute significantly to systemic risk, both in the Eurozone and in
the United States. Finally, the insurance industry appears to impact relatively less systemic risk
than the other financial services industry in the Eurozone, while banks contribute the least to
systemic risk in the United States.
Bernanke, Ben S., 2005, “The Global Saving Glut and the U.S. Current Account Deficit,”
(Washington, DC: Board of Governors of the Federal Reserve System).
Berry-Stolzle, Thomas R., Gregory P. Nini, and Sabine Wende, 2014, “External Financing
in the Life Insurance Industry: Evidence from the Financial Crisis,” Journal of Risk and
Insurance, forthcoming.
http://onlinelibrary.wiley.com/doi/10.1111/jori.12042/abstract;jsessionid=A4DA221005AD6E5F
E3C57D5245F8930D.f04t02?deniedAccessCustomisedMessage=&userIsAuthenticated=false
Abstract:
The financial crisis and subsequent recession generated sizable operating losses for life insurance
companies, yet the consequences were far less significant than for other financial intermediaries.
The ability to quickly generate new capital through external issuance and dividend reductions let
life insurers maintain healthy levels of equity capital. We use this experience to examine the
causes and consequences of external capital issuance by U.S. life insurance companies. We show
that, in general, new capital is issued both to support the growth of new business and to replace
capital depleted by operating losses. This second channel is particularly important during
macroeconomic recessions. Notably, we do not find any evidence that insurers had difficulty
generating new capital, unlike other financial service providers that required large amounts of
public support. For life insurers, what changed following the financial crisis was the demand to
raise external capital, but the supply of external capital appears to have remained constant.
Besar, D., P. Booth, K.K. Chan, A.K.L. Milne, and J. Pickles, 2011, British Actuarial
Journal 16: 195-300.
http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=8441805&fileId=S1
357321711000110
Abstract:
The current banking crisis has reminded us of how risks materializing in one part of the financial
system can have a widespread impact, affecting other financial markets and institutions and the
10
broader economy. This paper, prepared on behalf of the Actuarial Profession, examines how
such events have an impact on the entire financial system and explores whether such
disturbances may arise within the insurance and pensions sectors as well as within banking. The
paper seeks to provide an overview of a number of banking and other financial crises which have
occurred in the past, illustrated by four case studies. It discusses what constitutes a systemic
event and what distinguishes it from a large aggregate system wide shock. Finally, it discusses
how policy-makers can respond to the risk of such systemic financial failures.
Biggs, John H. and Matthew P. Richardson, eds., 2014, Modernizing Insurance Regulation
(New York: John Wiley).
Billio, Monica, Mila Getmansky, Andrew W. Lo, and Loriana Pelizzon, 2012,
“Econometric Measures of Connectedness and Systemic risk in the Finance and Insurance
Sectors,” Journal of Financial Economics 104: 535-559..
http://www.sciencedirect.com/science/article/pii/S0304405X11002868
Abstract:
We propose several econometric measures of connectedness based on principal-components
analysis and Granger-causality networks, and apply them to the monthly returns of hedge funds,
banks, broker/dealers, and insurance companies. We find that all four sectors have become
highly interrelated over the past decade, likely increasing the level of systemic risk in the finance
and insurance industries through a complex and time-varying network of relationships. These
measures can also identify and quantify financial crisis periods, and seem to contain predictive
power in out-of-sample tests. Our results show an asymmetry in the degree of connectedness
among the four sectors, with banks playing a much more important role in transmitting shocks
than other financial institutions.
Boyle, Phelim and Joseph H.T. Kim, 2012, “Designing a Countercyclical Insurance
Program for Systemic Risk,” Journal of Risk and Insurance 79: 963-993.
http://onlinelibrary.wiley.com/doi/10.1111/j.15396975.2012.01473.x/abstract?deniedAccessCustomisedMessage=&userIsAuthenticated=false
Abstract:
This article proposes a framework for measuring and managing systemic risk. Current solvency
regulations have been criticized for their focus on individual firms rather than the system as a
whole. We show how an insurance program can be designed to deal with systemic risk through a
risk charge on participating institutions. The risk charge is based on the generalized coconditional tail expectation, a conditional risk measure adapted from conditional value-at-risk.
Current regulations have been criticized on the grounds that their capital requirements are
procyclical. They require extra capital in periods of extreme stress thus exacerbating a crisis. We
show how to construct a countercyclical risk charge and illustrate the approach using a numerical
example.
Brechmann, Eike C., Katharina Hendrich, and Claudia Czado, 2013, “Conditional Copula
Simulation for Systemic Risk Stress Testing,” Insurance: Mathematics and Economics 53:
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722-732.
http://www.sciencedirect.com/science/article/pii/S016766871300142X
Abstract:
Since the financial crisis of 2007–2009 there is an active debate by regulators and academic
researchers on systemic risk, with the aim of preventing similar crises in the future or at least
reducing their impact. A major determinant of systemic risk is the interconnectedness of the
international financial market. We propose to analyze interdependencies in the financial market
using copulas, in particular using flexible vine copulas, which overcome limitations of the
popular elliptical and Archimedean copulas. To investigate contagion effects among financial
institutions, we develop methods for stress testing by exploiting the underlying dependence
structure. New approaches for Archimedean and, especially, for vine copulas are derived. In a
case study of 38 major international institutions, 20 insurers and 18 banks, we then analyze
interdependencies of CDS spreads and perform a systemic risk stress test. The specified
dependence model and the results from the stress test provide new insights into the
interconnectedness of banks and insurers. In particular, the failure of a bank seems to constitute a
larger systemic risk than the failure of an insurer.
Brunnermeier, Markus K., 2009, “Deciphering the Liquidity and Credit Crunch: 20072008,” Journal of Economic Perspectives 23: 77-100.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1317454
Abstract:
This paper summarizes and explains the main events of the liquidity and credit crunch in 200708. Starting with the trends leading up to the crisis, I explain how these events unfolded and how
four different amplification mechanisms magnified losses in the mortgage market into large
dislocations and turmoil in financial markets.
Brunnermeier, Markus K. and Lasse Heje Pedersen, 2009, “Market Liquidity and Funding
Liquidity,” The Review of Financial Studies 22 (6): 2201-2238.
http://rfs.oxfordjournals.org/content/22/6/2201.short
Abstract:
We provide a model that links an asset's market liquidity (i.e., the ease with which it is traded)
and traders' funding liquidity (i.e., the ease with which they can obtain funding). Traders provide
market liquidity, and their ability to do so depends on their availability of funding. Conversely,
traders' funding, i.e., their capital and margin requirements, depends on the assets' market
liquidity. We show that, under certain conditions, margins are destabilizing and market liquidity
and funding liquidity are mutually reinforcing, leading to liquidity spirals. The model explains
the empirically documented features that market liquidity (i) can suddenly dry up, (ii) has
commonality across securities, (iii) is related to volatility, (iv) is subject to “flight to quality,”
and (v) co-moves with the market. The model provides new testable predictions, including that
speculators' capital is a driver of market liquidity and risk premiums.
Bühler, Wolfgang, and Marcel Prokopczuk, 2010, "Systemic Risk: Is the Banking Sector
Special?," Available at SSRN 1612683.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1612683
12
Abstract:
In this paper, we empirically investigate the degree of systemic risk in the U.S. banking sector
versus other industry sectors. We characterize the systemic risk in each sector by the lower tail
dependence of stock returns. Our study differs from extant literature in three respects. First, we
compare the degree of systemic risk in the banking sector with other sectors in the economy.
Second, we analyze how systemic risk depends on the state of the stock market and the economy.
Third, we compare the systemic risk in the commercial and the investment banking sectors and
also investigate the systemic risk during the recent financial crisis. Our study shows that the
systemic risk in the banking sector is significantly larger than in all other sectors of the economy.
In particular, it differs from the systemic risk in the insurance sector, the second most strongly
regulated financial subsystem. Moreover, the degree of systemic risk for the banking sector is
higher under adverse market conditions. Finally, we document a substantial increase of systemic
risk during the financial crisis.
Castro, Carlos and Stijn Ferrari, 2014, “Measuring and Testing for Systemically Important
Financial Institutions,” Journal of Empirical Finance 25: 1-14.
Abstract:
This paper analyzes the measure of systemic importance ΔCoVaR proposed by Adrian and
Brunnermeier (2009, 2010) within the context of a similar class of risk measures used in the risk
management literature. In addition, we develop a series of testing procedures, based on ΔCoVaR,
to identify and rank the systemically important institutions. We stress the importance of
statistical testing in interpreting the measure of systemic importance. An empirical application
illustrates the testing procedures, using equity data for three European banks.
CEA, Insurers of Europe, 2010, Insurance: A Unique Sector – Why Insurers Differ From
Banks (Brussels, Belgium).
Abstract:
The CEA report, entitled "Insurance: a unique sector-Why insurers differ from banks", includes
12 recommendations of ways to strengthen regulatory and supervisory frameworks
for insurers while still taking into account the strength of the insurance business model.
Chan-Lau, J.A. and T. Gravelle, 2005. “The End: A New Indicator of Financial and
Nonfinancial Corporate Sector Vulnerability,” IMF working paper No. 05/231.
http://www.imf.org/external/pubs/cat/longres.cfm?sk=18654.0
Abstract:
This paper describes a corporate sector vulnerability indicator, the expected number of defaults
(END), based on the joint occurrence of defaults among a number of firms and/or institutions.
the END indicator is general enough to assess systemic risk in the corporate and financial
sectors, as well as systemic sovereign risk; and is also forward looking as it is constructed using
information implied by financial securities prices. Using equity prices and balance-sheet data, we
calculate the END to assess systemic risk in the corporate sector in Korea, Malaysia, and
Thailand. We also discuss how the END systemic risk indicator overcomes some of the
shortcomings of other vulnerability indicators.
13
Charissiadis, Panos and Kathrin Hoppe, 2013, Group-Wide Risk and Capital Management
of Internationally Active Insurance Groups – Current Practices and Challenges (Geneva,
Switzerland: The Geneva Association).
https://www.genevaassociation.org/media/463708/ga2013-comframe_survey.pdf
Introduction:
With the 2012 ComFrame draft, the International Association of Insurance Supervisors (IAIS) on
1 July 2012 presented a comprehensive version of the envisaged framework for the supervision
of internationally active insurance groups (IAIGs). In the subsequent discussion and
consultation, it became apparent that, although the industry was supporting the overall objectives
of this endeavour, concerns have been raised in particular with regard to Module 2 of the 2012
ComFrame draft, dealing mainly with enterprise risk management and the assessment of the
groups’ financial condition.
The importance of these issues encouraged The Geneva Association to prepare a contribution to
the ComFrame discussion by analyzing existing IAIG risk and capital management practices
across the globe. Based on a questionnaire explicitly developed by a working group for this
purpose, The Geneva Association conducted an empirical survey in this area with contributions
from 19 insurance groups. The main purpose of the present report will be achieved if the survey
findings assist the International Association of Insurance Supervisors (IAIS) to better understand
current practices and gain a better appreciation of the variety of approaches and methods used,
reflecting the different set-up of IAIGs and their aspiration to have appropriate risk and capital
management tools in place.
Chen, Fang, Xuanjuan Chen, Zhenzhen Sun, Tong Yu, and Ming Zhong, 2013, “Systemic
Risk, Financial Crisis, and Credit Risk Insurance,” Financial Review 48: 417-442.
http://onlinelibrary.wiley.com/doi/10.1111/fire.12009/abstract
Abstract:
Differing from conventional insurance firms whose underwriting business does not contribute to
systemic risk, credit risk insurance companies providing credit protections for debt obligations
are exposed to systemic risk. We show that credit risk insurers (CRIs) underperformed
conventional insurance companies during the 2007–2009 financial crisis, and such
underperformance is attributed to the greater systemic risk of CRIs. We also find that the credit
spreads of insured bonds increase significantly after their insurers are downgraded or put in the
negative watch list. We control for alternative factors affecting bond credit spreads and the result
is robust.
Chen, Frank, Xuanjuan Chen, Zhenzhen Sun, and Tong Yu, 2013, “Financial Crisis,
Systemic Risk, and Performance of Financial Risk Insurers,” working paper, University of
Rhode Island, Kingston, RI.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1664158
Abstract:
Most traditional insurance companies have escaped the financial storms during 2007-2009 while
companies engaging in financial risk taking were not this lucky. In this study, we examine
the performance of financial risk insurers and analyze the contributing role of financial risk
14
insurers to systemic risk during the crisis. First, we find a subset of financial risk insurance
companies, financial guaranty insurers, are badly affected by the financial crisis both in
terms of their stock and operating performance. Second, in line with financial contagion, we
find insurer performance is highly correlated with various measures of systemic risks. Finally,
the deterioration of financial risk insurers’ performance has a negative externality on corporate
bonds they insure. The yield spreads of bonds insured by financial guaranty insurers increase
after the insurers experience rating downgrades, resulting in significant wealth loss for
bondholders.
Chen, Hua, J. David Cummins, Krupa S. Viswanathan, and Mary A. Weiss, 2014, “Systemic
Risk and the Inter-Connectedness between Banks and Insurers: An Econometric Analysis,”
Journal of Risk and Insurance, forthcoming.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1997437
Abstract:
This paper uses high frequency market value data on credit default swap spreads and intra-day
stock prices to measure systemic risk in the insurance sector. Using the systemic risk measure,
we examine the inter-connectedness between banks and insurers with Granger causality tests.
Based on linear and non-linear causality tests, we find evidence of significant bidirectional
causality between insurers and banks. However, after correcting for conditional
heteroskedasticity, the impact of banks on insurers is stronger and of longer duration than the
impact of insurers on banks. Stress tests confirm that banks create significant systemic risk for
insurers but not vice versa.
Chen, Hua, J. David Cummins, Krupa S. Viswanathan, and Mary A. Weiss, 2014
“Systemic Risk Measures in the Insurance Industry: A Copula Approach,” working paper,
Temple University, Philadelphia, PA.
Chen, Hua, J. David Cummins, Tao Sun, and Mary A. Weiss, “The Microstructure of the
Reinsurance Network and Its Implications for Firm Performance,” working paper, Temple
University, Philadelphia, PA.
Chiu, Wan-Chien, Juan Ignacio Pena, and Chih-Wei Want, 2014, “Measuring Systemic
Risk: Common Factor Exposures and Tail Dependence Effects,” forthcoming, European
Financial Management.
Abstract:
We model systemic risk by including a common factor exposure to market-wide shocks and
an exposure to tail dependence effects arising from linkages among extreme stock returns.
Specifically our model allows for the firm-specific impact of infrequent and extreme events.
When a jump occurs, its impact is in the same direction for all firms (either positive or negative),
but its size and volatility are firm-specific. Based on the model we compute three measures
of systemic risk: DD, NoD and ESR. Empirical results using data on the four sectors of the U.S.
financial industry from 1996 to 2011 suggest that simultaneous extreme negative movements
across large financial institutions are stronger in bear markets than in bull markets. Disregarding
15
the impact of the tail dependence element implies a downward bias in the measurement
of systemic risk especially during weak economic times. Two measures based on the BrokerDealers sector (DD, NoD) and one measure (ESR) based on the Insurance sector lead the St.
Louis Fed Financial Stress Index (STLFSI).
Colletaz, Gilbert, Christophe Hurlin, and Christophe Perignon, 2013, “The Risk Map: A
New Tool for Validating Risk Models,” Journal of Banking and Finance 37: 3843-3854.
Abstract:
This paper presents a new method to validate risk models: the Risk Map. This method jointly
accounts for the number and the magnitude of extreme losses and graphically summarizes all
information about the performance of a risk model. It relies on the concept of a super exception,
which is defined as a situation in which the loss exceeds both the standard Value-at-Risk (VaR)
and a VaR defined at an extremely low probability. We then formally test whether the sequences
of exceptions and super exceptions are rejected by standard model validation tests. We show that
the Risk Map can be used to validate market, credit, operational, or systemic risk estimates
(VaR, stressed VaR, expected shortfall, and CoVaR) or to assess the performance of the margin
system of a clearing house.
Colquit, Lee, Claire Crutchley, and Steve Swidler, 2012, “Sustainable Insurance Firms in
Unsustainable Economic Times: Do Sustainable Corporate Policies Matter in Times of
Financial Crisis?” International Review of Accounting, Banking, and Finance 4: 1-19.
http://www.irabf.org/
Abstract:
This paper examines whether insurance companies pursuing sustainable goals are better able to
manage economic risks during times of financial crisis. Using a unique set of survey results for
63 international insurance companies, we find that firms with high and low sustainability
rankings exhibit little difference in value and performance measures. However, bond ratings
suggest that greater sustainability measures lower default risk, and subsequent to the financial
crises, many of the firms that no longer exist as independent, publicly traded firms originally had
low sustainability scores. Taken as a whole, the results suggest that there are good reasons to
incorporate detailed risk management plans as part of an insurance company’s sustainability
effort, although these measures may not necessarily be a panacea in times of financial crisis.
Cummins, J. David, 2005, “Convergence in Wholesale Financial Services: Reinsurance
and Investment Banking,” Geneva Papers on Risk and Insurance -- Issues and Practice 30:
187–222.
Abstract:
One of the most significant economic developments of the past decade has been the convergence
of the previously separate segments of the financial services industry – particularly the banking
and insurance sectors. Convergence has been driven by increasing globalization of the financial
services sector, the deregulation of financial markets, and advances in computer and modeling
technologies. The shift in focus towards enterprise-wide corporate risk management solutions
has created a growing demand for new risk management products. These developments provide
opportunities for the traditional wholesalers of risk management products, particularly
16
investment banks and reinsurers. The paper discusses the core competencies of banks and
reinsurers and the factors needed for success in the evolving market. The discussion considers
the merits of unbundling the traditional insurance value chain to create more responsive
organizations and de-emphasize residual risk bearing by (re)insurers. The paper focuses on
opportunities in innovative wholesale risk management products, including products that modify
classic (re)insurance product models but do not access broader capital markets and risk-linked
securities that access capital markets directly.
Cummins, J. David, 2007, “Reinsurance for Natural and Man-Made Catastrophes in the
United States: Current State of the Market and Regulatory Reforms,” Risk Management
and Insurance Review 10: 179-220.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=997928
Abstract:
U.S. insurers are heavily dependent on global reinsurance markets to enable them to provide
adequate primary market insurance coverage. This article reviews the response of the world's
reinsurance industry to recent mega-catastrophes and provides recommendations for regulatory
reforms that would improve the efficiency of reinsurance markets. The article also considers the
supply of insurance and reinsurance for terrorism and makes recommendations for joint public–
private responses to insuring terrorism losses. The analysis shows that reinsurance markets
responded efficiently to recent catastrophe losses and that substantial amounts of new capital
enter the reinsurance industry very quickly following major catastrophic events. Considerable
progress has been made in improving risk and exposure management, capital allocation, and rate
of return targeting. Insurance price regulation for catastrophe-prone lines of business is a major
source of inefficiency in insurance and reinsurance markets. Deregulation of insurance prices
would improve the efficiency of insurance markets, enabling markets to deal more effectively
with mega-catastrophes. The current inadequacy of the private terrorism reinsurance market
suggests that the federal government may need to remain involved in this market, at least for the
next several years.
Cummins, J. David, 2008, The Bermuda Insurance Market: An Economic Analysis
(Hamilton, Bermuda: Bermuda Insurance Market),
www.bermuda-insurance.org.
Cummins, J. David, Ran Wei, and Xiaoying Xie, 2012, Financial Sector Integration and
Information Spillovers: Effects of Operational Risk Events on U.S. Banks and Insurers,
working paper, Temple University, Philadelphia, PA.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1071824
Abstract:
This paper conducts an event study analysis of the market value impact of operational loss events
on non-announcing firms in the U.S. banking and insurance industries. We seek evidence of
negative or positive information spillovers, i.e., that operational risk events have negative effects
on stock prices of non-announcing firms or lead to wealth transfers from announcing to nonannouncing firms. Three main sectors of the financial services industry are analyzed –
commercial banking, investment banking, and insurance – and both intra and inter-sector
17
analyses are conducted. The rationale for anticipating inter-sector spillover effects is the
integration of the previously fragmented markets for financial services that has occurred over the
past twenty-five years – banks have entered the insurance market and insurers offer wholesale
and retail financial products in competition with banks. The results indicate that operational risk
events cause strong negative intra and inter-sector spillover effects, i.e., the stock prices of nonannouncing firms respond negatively to operational loss announcements. Regression analysis
reveals that the negative effect is information-based rather than purely contagious.
Cummins, J. David and Mary A. Weiss, 2009, “Convergence of Insurance and Financial
Markets: Hybrid and Securitized Risk-Transfer Solutions,” The Journal of Risk and
Insurance 76 (3): 493-545.
Abstract:
One of the most significant economic developments of the past decade has been the convergence
of the financial services industry, particularly the capital markets and (re)insurance sectors.
Convergence has been driven by the increase in the frequency and severity of catastrophic risk,
market inefficiencies created by (re)insurance underwriting cycles, advances in computing and
communications technologies, the emergence of enterprise risk management, and other factors.
These developments have led to the development of hybrid insurance/financial instruments that
blend elements of financial contracts with traditional reinsurance as well as new financial
instruments patterned on asset-backed securities, futures, and options that provide direct access
to capital markets. This article provides a survey and overview of the hybrid and pure financial
markets instruments and provides new information on the pricing and returns on contracts such
as industry loss warranties and Cat bonds.
Cummins, J. David and Mary A. Weiss, 2000, “The Global Market for Reinsurance:
Consolidation, Capacity, and Efficiency,” Brookings-Wharton Papers on Financial Services:
2000: 159-222.
Cummins, J. David and Mary A. Weiss, 2013 “Systemic Risk and the Insurance Industry,”
in Georges Dionne, ed., Handbook of Insurance, 2nd ed. (New York: Springer), ch. 27, pp.
745-794.
Cummins, J. David and Mary A. Weiss, 2014, “Systemic Risk and Regulation of the U.S.
Insurance Industry,” in John H. Biggs and Matthew Richardson,eds., Modernizing
Insurance Regulation (New York: John Wiley).
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2400577
Abstract:
This chapter analyzes the characteristics of U.S. insurers for purposes of determining whether
they are systemically risky. More specifically, primary indicators and contributing factors
associated with systemic risk are assessed for the insurance sector. A distinction is made
between the core activities of insurers (e.g., underwriting, reserving, claims settlement, etc.) and
their non-core activities (such as providing financial guarantees). Statistical analysis of insurer
characteristics and their relationship with a well-known systemic risk measure, SRISK, is
18
provided. The core activities of property-casualty insurers are found not to be systemically risky.
However, we find evidence that some core activities of life insurers, particularly separate
accounts and group annuities, may be associated with systemic risk. The non-core
activities of both types of insurers can contribute to systemic risk. The study also finds that
insurers may be susceptible to intra-sector crises such as reinsurance crises arising from
counterparty credit risk. New and proposed state and federal regulations are reviewed in light of
the potential for systemic risk for this sector.
Cummins, J. David and Mary A. Weiss, 2014, “Systemic Risk and the U.S. Insurance
Sector,” Journal of Risk and Insurance, forthcoming.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1725512
Abstract:
This paper examines the potential for the U.S. insurance industry to cause systemic risk events
that spill over to other segments of the economy. We examine primary indicators that determine
whether institutions are systemically risky as well as contributing factors that exacerbate
vulnerability to systemic events. Evaluation of systemic risk is based on a detailed financial
analysis of the insurance industry, its role in the economy, and the interconnectedness of
insurers. The primary conclusion is that the core activities of the U.S. insurers do not pose
systemic risk. However, life insurers are vulnerable to intra-sector crises because of leverage and
liquidity risk; and both life and property-casualty insurers are vulnerable to reinsurance crises
arising from counterparty credit exposure. Non-core activities such as derivatives trading
have the potential to cause systemic risk, and most global insurance organizations have exposure
to derivatives markets. To reduce systemic risk from non-core activities, regulators need to
develop better mechanisms for insurance group supervision.
De Bandt, Olivier and Philipp Hartmann, 2000, “Systemic Risk: A Survey,” European
Central Bank Working Paper Series, Working Paper No. 35, November, Frankfurt,
Germany.
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp035.pdf
Abstract:
This paper develops a broad concept of systemic risk, the basic economic concept for the
understanding of financial crises. It is claimed that any such concept must integrate systemic
events in banking and financial markets as well as in the related payment and settlement systems.
At the heart of systemic risk are contagion effects, various forms of external effects. The concept
also includes simultaneous financial instabilities following aggregate shocks. The quantitative
literature on systemic risk, which was evolving swiftly in the last couple of years, is surveyed in
the light of this concept. Various rigorous models of bank and payment system contagion have
now been developed, although a general theoretical paradigm is still missing. Direct econometric
tests of bank contagion effects seem to be mainly limited to the United States. Empirical studies
of systemic risk in foreign exchange and security settlement systems appear to be non-existent.
Moreover, the literature surveyed reflects the general difficulty to develop empirical tests that
can make a clear distinction between contagion in the proper sense and joint crises caused by
common shocks, rational revisions of depositor or investor expectations when information is
asymmetric (“information-based” contagion) and “pure” contagion as well as between “efficient”
and “inefficient” systemic events.
19
De May, Jozef, 2003, “The Aftermath of September 11: The Impact on and Systemic Risk
to the Insurance Industry,” The Geneva Papers on Risk and Insurance 28: 65-70.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=377074
Abstract:
Before discussing the effects of the attacks of 11 September 2001, we should be aware that the
effects on the insurance industry, as serious as they may be, are small compared with the
enormous human tragedy and the direct and indirect economic losses suffered by the City of
New
York.
When analyzing the effects of the terrible events of September 11, it is useful to make a
distinction between direct and indirect effects.
De Nicolo, Gianni and Myron L. Kwast. 2002, "Systemic risk and financial consolidation:
Are they related?." Journal of Banking & Finance 26: 861-880.
http://www.imf.org/external/pubs/ft/wp/2002/wp0255.pdf
Dinallo, Eric R., 2014, “Lessons Learned from AIG for Modernizing Insurance
Regulation,” in John H. Biggs and Matthew Richardson,eds., Modernizing Insurance
Regulation (New York: John Wiley).
http://onlinelibrary.wiley.com/doi/10.1002/9781118766798.ch5/summary
Summary:
The September 2008 crisis for American International Group (AIG) did not come from its stateregulated insurance companies. The primary source of the problem was AIG Financial Products,
which wrote credit default swaps (CDSs), derivatives, and futures with a notional amount of
about $2.7 trillion, about $440 billion of which were credit default swaps. What happened at AIG
arguably demonstrates the strength and effectiveness of state insurance regulation, not the
opposite. State regulation requires that insurance companies maintain healthy reserves backed by
investments that cannot be used for any other purpose. There are activities that the states need to
improve, such as licensing and bringing new products to market. But where they are strong has
been in maintaining solvency. Clearly a lesson from this crisis is that all financial institutions
should be required to hold sufficient capital and reserves to meet their promises and liquidity
needs
Drake, Pamela P. and Faith R. Neale, 2011, “Financial Guarantee Insurance and
Failures in Risk Management,” Journal of Insurance Regulation 30: 29–76.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1703602
Abstract:
The financial meltdown that began in 2007 revealed problems with the financial guarantee
insurers and regulation of these insurers. Financial guarantee insurers, with business models
dependent on AAA-credit ratings, were exposed to risks that threatened those ratings. These
insurers had four primary sources of risk: the proportion of structured finance in the insurance
portfolio, the proportion of structured finance in their investment portfolio, selling credit default
swaps, and providing guaranteed investment contracts. These exposures provided a toxic mix
20
once the structured finance market faltered and credit ratings fell. We examine these risk
exposures and the failings of the regulatory framework of these insurers.
Eling, Martin, Nadine Gatzert, and Hato Schmeiser, 2008, “The Swiss Solvency Test and
its Market Implications,” Geneva Papers on Risk and Insurance—Issues and Practice 33:
418– 439.
http://www.ivw.unisg.ch/~/media/Internet/Content/Dateien/InstituteUndCenters/IVW/WPs/WP5
3.ashx
Abstract
In this paper, we first discuss the characteristics and major benefits of the Swiss risk-based
capital standards for insurance companies (Swiss Solvency Test), introduced in 2006. As the
insurance industry is one of the largest institutional investors
in Switzerland, changes to its asset and liability management as a result of the new regulatory
framework could have striking economic effects. Thus, we further examine significant market
implications for the Swiss economy due to possible changes in the asset and liability
management of Swiss insurance companies. We investigate resulting effects on the Swiss capital
market, focusing on bond, real estate, stock, foreign exchange markets, and the situation in case
of a capital market crisis. Furthermore, we analyze potential consequences to corporate financing
and product design. Most of the considered consequences result from the transition of
past (in principle not risk-based) supervision to risk-based supervision and can thus be
generalized to other supervision systems, in particular Solvency II.
Eling, Martin and David Pankoke, 2014, “Systemic Risk in the Insurance Sector: What
Do We Know? working paper, University of St. Gallen, St. Gallen, Switzerland.
http://www.ivw.unisg.ch/~/media/Internet/Content/Dateien/InstituteUndCenters/IVW/WPs/WP
124.ashx
Abstract:
This paper reviews the extant research on systemic risk in the insurance sector and outlines
potential new areas of research in this field. We summarize 43 theoretical and empirical research
papers from both academia and practitioner organizations and provide a classification of existing
research. Our results show, in general, that traditional insurance activity in the life, non-life, and
reinsurance sectors neither contribute to systemic risk, nor increase insurers' vulnerability to
impairments of the financial system. However, nontraditional activities (e.g., CDS writing) might
increase vulnerability and life insurers might be more vulnerable than non-life insurers due to
higher leverage. Furthermore, it is especially CDS and financial guarantees in the underwriting
process as well as securitization of business, including guarantees and short-term funding, in the
funding and investing process that are likely to contribute to systemic risk. This paper is of
interest not only to academics, but is also highly relevant for the industry, regulators, and
policymakers.
Eling, Martin and Hato Schmeiser, 2010, “Insurance and Credit Crisis: Impact and
Ten Consequences for Risk Management Supervision,” Geneva Papers on Risk and
Insurance—Issues and Practice 35: 9–34.
http://www.palgrave-journals.com/gpp/journal/v35/n1/full/gpp200939a.html
21
Abstract:
Although the insurance industry is less affected than the banking industry, the credit crisis has
revealed room for improvement in its risk management and supervision. Based on this
observation, we formulate ten consequences for risk management and insurance regulation.
Many of these reflect current discussions in academia and practice, but we also add a number of
new ideas that have not yet been the focus of discussion. Among these are specific aspects of
agency and portfolio theory, a concept for a controlled run-off for insolvent insurers, new
principles in stress testing, improved communication aspects, market discipline, and
accountability. Another contribution of this paper is to embed the current practitioners’
discussion in the recent academic literature, for example, with regard to the regulation of
financial conglomerates.
Eling, Martin, Hato Schmeiser, and Joan T. Schmit, 2007, “The Solvency II Process:
Overview and Critical Analysis,” Risk Management and Insurance Review 10: 69–85.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=869267
Abstract:
As early as the 1970s, European Union (EU) member countries implemented rules to coordinate
insurance markets and regulation. However, with the more recent movement toward a general
single EU market, financial services regulation has taken on new meaning and priority. Solvency
I regulations went into effect for member nations by January 2004. The creation of risk-based
capital standards, the main focus of Solvency II, now appears likely sometime after 2007. The
purpose of the discussion presented here is to outline the specifics of Solvency II as they
currently stand and provide input to evaluation process that, ultimately, will determine the exact
form of capital regulation. Our analysis leads us to conclude that caution is warranted.
Ellul, Andrew, Chotibhak Jotikasthira, Christian T. Lundblad, and Yihui Wang, 2014,
“Mark-to-Market Accounting and Systemic Risk: Evidence from the Insurance Industry,”
Economic Policy 29: 297-341.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2266247
Abstract:
One of the most contentious issues raised during the recent crisis has been the potentially
exacerbating role played by mark-to-market accounting. Many have proposed the use of
historical cost accounting, promoting its ability to avoid the amplification of systemic risk. We
caution against focusing on the accounting rule in isolation, and instead emphasize the
interaction between accounting and the regulatory framework. First, historical cost accounting,
through incentives that arise via interactions with complex capital adequacy regulation, does
generate market distortions of its own. Second, while mark-to-market accounting may indeed
generate fire sales during a crisis, forward-looking institutions that rationally internalize the
probability of fire sales are incentivized to adopt a more prudent investment strategy during
normal times which leads to a safer portfolio entering the crisis. Using detailed, position- and
transaction-level data from the U.S. insurance industry, we show that (a) market prices do serve
as ‘early warning signals’, (b) insurers that employed historical cost accounting engaged in
greater degrees of regulatory arbitrage before the crisis and limited loss recognition during the
crisis, and (c) insurers facing mark-to-market accounting tend to be more prudent in their
portfolio allocations. Our identification relies on the sharp difference in statutory accounting
22
rules between life and P&C companies as well as the heterogeneity in implementation of these
rules within each insurance type across U.S. states. Rather than promoting a shift away from
market-based information, our results indicate that regulatory simplicity may be preferred to the
complexity of risk-weighted capital ratios that gives rise, through interactions with accounting
rules, to distorted risk-taking incentives and potential build-up of systemic risk.
European Central Bank, 2007, Potential Impact of Solvency II on Financial Stability
(Frankfurt, Germany).
https://www.ecb.europa.eu/pub/pdf/other/potentialimpactsolvencyiionfinancialstability200707en.
pdf
Federal Deposit Insurance Corporation (FDIC ), 1997, “Continental Illinois and ‘Too Big
to Fail,” in History of the Eighties – Lessons for the Future, vol. 1, ch. 7, pp. 235-258
(Washington,
DC).
http://www.fdic.gov/bank/historical/history/235_258.pdf
Financial Stability Board, 2009, Guidance to Assess the Systemic Importance of Financial
Institutions, Markets and Instruments: Initial Considerations, Report to the G20 Finance
Ministers and Central Bank Governors (Basel, Switzerland: Bank for International
Settlements).
http://www.imf.org/external/np/g20/pdf/100109a.pdf
Fiordelisi, Franco and David Marques-Ibanez, 2013, “Is Bank Default Risk Systemic?”
Journal of Banking and Finance 37: 2000-2010.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1895369
Abstract:
We evaluate the impact of commonly used indicators of bank distress on broad (i.e. sector and
country) risks. This issue deserves special attention in the banking industry where there is a
strong degree of interconnectedness among institutions and the default of a single bank may
cause a cascading failure, which could potentially bankrupt the entire system. Using several
measures of individual bank risk our results show that these measures have a direct impact on
European banking (i.e. systemic) stock market risk. We also provide strong evidence suggesting
that, for listed banks, default risk tends to be systematic (i.e. non-diversifiable).
Floreani, Alberto, 2013, “Risk Measures and Capital Requirements: A Critique of Solvency
II Approach,” Geneva Papers on Risk and Insurance: Issues and Practices 38: 189-212.
http://www.frsn.de/fileadmin/research/themen/regulation/auf%20frsn_2013/Palgrave_Critique%
20Solvency%202_3-2012_kl.pdf
Gallanis, Peter G., 2009, “NOLHGA, the Life and Health Insurance Guaranty System, and
the Financial Crisis of 2008-2009,”presentation at Insurer Receivership and Run-off: The
23
Next Level, American Bar Association, Tort Trial & Insurance Practice Session, New York,
NY (available at http://www.nolhga.com/factsandfigures/main.cfm).
https://www.nolhga.com/resource/file/NOLHGAandFinancialCrisis.pdf
Introduction:
Since the early 1970s, life, annuity, and health insurance consumers have received protection
against the financial risk of the insolvency of their insurer from guaranty associations (GAs) in
their states of residence. 1
Participants in the 2009 ABA/TIPS program have a particular interest in the “next level” of
receiverships and the use of run-off techniques in today’s very challenging economic
environment. Among other things, this paper addresses the extensive use of run-off concepts in
prior multi-state life insurer insolvency cases and the potential use of GA-supported runoffs,
should the current economic crisis cause the insolvency of one or more nationally significant
insurers. Conventional run-off techniques have long been a basic option in the guaranty system’s
“playbook.”
Fifty-two guaranty associations (for the 50 states, Puerto Rico, and the District of Columbia)
coordinate consumer protection in major insolvencies (those involving multiple states) through
their membership in the National Organization of Life and Health Insurance
Guaranty Associations (NOLHGA), a not-for-profit corporation organized in 1983.
NOLHGA’s members have protected consumers in many life and health company failures,
including roughly 75 multi-state insolvency cases.
The purpose of this paper is to discuss briefly the mission of the life guaranty system (Part I); the
development of the guaranty system in the context of U.S. insurer insolvency resolutions (Part
II); the operations of the guaranty system when insurers fail (Part III); and the financial capacity
of the guaranty system (Part IV).
Gallanis, Peter G., 2014, “Policyholder Protection in the Wake of the Financial Crisis,” in
John H. Biggs and Matthew Richardson,eds., Modernizing Insurance Regulation (New
York: John Wiley).
http://onlinelibrary.wiley.com/doi/10.1002/9781118766798.ch11/summary
Abstract:
As the financial crisis postmortems continue, and as implementation of U.S. financial market
regulatory reforms under the Dodd-Frank Act slowly proceeds, a recurring question arises: How
confident should purchasers and beneficiaries of insurance products be that the essential
promises of their contracts will be fulfilled? This chapter proposes the following answer to that
question: Consumers should be confident that insurers' commitments to them will be honored.
The focus of the chapter is on how the life and health insurance guaranty system, working in
conjunction with insurance regulators and receivers, operates to protect consumers who own
policies and contracts with troubled life and health insurers. The chapter explains how the core
insurance business model operates, how insurers are regulated for solvency, how insurance
company resolution processes operate in the relatively rare cases when insurers fail, and how the
insurance guaranty system works in tandem with the insurance regulatory and receivership
processes.
Geneva Association, 2010, Systemic Risk in Insurance: An Analysis of Insurance and
24
Financial Stability (Geneva, Switzerland).
https://www.allianz.com/media/responsibility/documents/geneva_association_report_on_systemi
c_risk_in_insurance.pdf
Abstract:
The financial crisis has engendered widespread calls to further regulate the financial sector.
Among the many proposals under consideration or implementation is the idea of applying more
stringent supervision and, perhaps, more onerous regulations to “systemically relevant
institutions”. This proposal is usually conceived as applying to banks. However, some
institutions and governments have recently suggested that a similar approach could be taken to
insurers.
Geneva Association, 2011, Considerations for Identifying Systemically Important Financial
Institutions in Insurance (Geneva, Switzerland).
https://www.genevaassociation.org/media/99275/ga2011considerations_for_identifying_sifis_in_insurance.pdf
Geneva Association, 2012a, Insurance Regulation: Reflections for a Post-Crisis World
(Geneva, Switzerland).
https://www.genevaassociation.org/media/99405/ga2012-insurance_regulationreflections_for_a_post-crisis_world.pdf
Geneva Association, 2012b, Surrenders in the Life Insurance Industry and their Impact on
Liquidity (Geneva, Switzerland).
https://www.genevaassociation.org/media/99452/ga2012surrenders_in_the_life_insurance_industry.pdf
Geneva Association, 2012c, Insurance and Resolution in Light of the Systemic Risk Debate
(Geneva, Switzerland).
https://www.genevaassociation.org/media/99359/ga2012insurance_and_resolution_in_light_of_the_systemic_risk_debate.pdf
Geneva Association, 2013a, Special Issue on G-SII Designations and a Global Capital
Standard for Insurance, Insurance and Finance Newsletter, No. 12 (October) (Geneva,
Switzerland).
Geneva Association, 2013b, Variable Annuities – An Analysis of Financial Stability (Geneva
Switzerland).
https://www.genevaassociation.org/media/618236/ga2013-variable_annuities.pdf
Georgosouli, Andromachi and Miriam Goldby, 2015, Systemic Risk and the Future of
25
Insurance Regulation (Abington, UK: Routledge).
http://www.76216.com/books/details/9780415744676/
Introduction:
This book will discuss and analyse policy developments that have been occurring in the field of
financial regulation and the implications for the insurance industry and markets.
The reform of insurance regulation has been a controversial subject for some time. A key driver
of the reform has been the need to maintain financial stability by taking better control of
systemic risk. Although there is a general consensus in favour of measures that aim to ensure a
stable financial system, there is considerable debate as to whether insurance business is actually
systemic. This book analyses systemic risk and the nature of insurance business, offering a
critical assessment of what this interaction tells us about the rationale and merits of the current
reform that is shaping the future of insurance regulation.
With contributors from a variety of fields including academia, legal practice, the insurance
industry and financial regulation in the UK and the US this book will be essential reading for
policy-makers, insurance regulators, insurance and legal professionals as well as students and
academics researching and studying insurance law.
Girardi, Giulio and A. Tolga Ergun, 2013, “Systemic Risk Measurement: Multivariate
GARCH Estimation of CoVar,” Journal of Banking and Finance 37: 3169-3180.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1783958
Abstract:
We modify Adrian and Brunnermeier's (2011) CoVaR, the Value-at-Risk (VaR) of the financial
system conditional on an institution being in financial distress. We change the
definition of financial distress from an institution being exactly at its VaR to being at most at its
VaR. This change allows us to consider more severe distress events that are farther in the tail, to
backtest CoVaR, and to improve its consistency (monotonicity) with respect to the dependence
parameter. In addition, unlike in Adrian and Brunnermeier, the CoVaR of an institution here has
a time-varying exposure to its VaR due to the time-varying correlation. We define the systemic
risk contribution of an institution as the change from its CoVaR in its benchmark state, which we
take as a one-standard deviation event, to its CoVaR under financial distress. We estimate
the systemic risk contributions of four financial industry groups consisting of a large
number of institutions for the sample period June 2000 to February 2008. We also investigate the
link between institutions' contributions to systemic risk and their characteristics such as size,
leverage, and equity beta. Finally, using 12 months of data prior to the beginning of June 2007,
we compute industry groups' pre-crisis systemic risk contributions.
Goodman, Molly Rose, 2013, “The Buck Stops Here: Toxic Titles and Title Insurance,”
Real Estate Law Journal 42:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2288280
Abstract:
By failing to properly transfer ownership of loans and mortgages, recording fraudulent
documents, and performing unlawful foreclosures, financial institutions and law firms have
26
generated property titles that range from defective to toxic. Those actions evince a systemic
failure to comply with longstanding principles of real property law and regulations governing
financial transactions. Title companies participated in title services and issued title insurance
policies throughout the housing boom and although they did not directly cause toxic titles,
many title insurers
have
ultimately
assumed the risk
for the bad
practices
that
became the industry norms in the last decade. In this article, I will discuss how title insurers have
exposed themselves to liability for toxic titles.
Gorton, Gary, 2008, “The Panic of 2007,” National Bureau of Economic Research working
paper 14358, Cambridge, MA.
http://www.nber.org/papers/w14358
Abstract:
How did problems with subprime mortgages result in a systemic crisis,
a panic? The ongoing Panic of 2007 is due to a loss of information about the location and
size of risks of loss due to default on a number of interlinked securities, special purpose vehicles,
and derivatives, all related to subprime mortgages. Subprime mortgages are a financial
innovation designed to provide home ownership opportunities to riskier borrowers. Addressing
their risk required a particular design feature, linked to house price appreciation. Subprime
mortgages were then financed via securitization, which in turn has a unique design
reflecting the subprime mortgage design. Subprime securitization tranches were often sold to
CDOs, which were, in turn, often purchased by market value off-balance sheet vehicles.
Additional subprime risk was created (though not on net) with derivatives. When the housing
price bubble burst, this chain of securities, derivatives, and off-balance sheet vehicles could not
be
penetrated
by
most
investors
to
determine the location
and
size of
the risks. The introduction of the ABX indices, synthetics related to portfolios of subprime bonds,
in 2006 created common knowledge about the effects of these risks by providing centralized
prices and a mechanism for shorting. I describe the relevant securities, derivatives, and vehicles
and provide some very simple, stylized, examples to show: (1) how asymmetric information
between the sell-side
and the buy-side
was
created
via
complexity;
(2)
how the chain of interlinked securities was sensitive to house prices; (3) how the risk was spread
in an opaque way; and (4) how the ABX indices allowed information to be aggregated and
revealed. I argue that these details are at the heart of the answer to the question of the origin of
the Panic of 2007.
Gorton, Gary and Andrew Metrick, 2010, “Regulating the Shadow Banking System,”
working paper, Yale University, New Haven, CT.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1676947
Abstract:
The “shadow” banking system played a major role in the financial crisis, but was not a central
focus of the recent Dodd-Frank Law and thus remains largely unregulated. This paper proposes
principles for the regulation of shadow banking and describes a specific proposal to implement
those principles. We first document the rise of shadow banking over the last three decades,
helped by regulatory and legal changes that gave advantages to three main institutions of shadow
banking: money-market mutual funds (MMMFs) to capture retail deposits from traditional banks,
securitization to move assets of traditional banks off their balance sheets, and repurchase
27
agreements (“repo”) that facilitated the use of securitized bonds in financial transactions as a
form of money. A central idea of this paper is that the evolution of a bankruptcy “safe harbor”
for repo has been a crucial feature in the growth and efficiency of shadow banking, and so
regulators can use access to this safe harbor as the lever to enforce new rules. As for the rules
themselves, history has demonstrated two successful methods for the regulation of privately
created money: strict guidelines on collateral (used to stabilize national bank notes in the 19th
century), and government-guaranteed insurance (used to stabilize demand deposits in the 20th
century). We propose the use of insurance for MMMFs combined with strict guidelines on
collateral for both securitization and repo as the best approach for shadow banking, with
regulatory control established by chartering new forms of narrow banks for MMMFs and
securitization and using the bankruptcy safe harbor to incent compliance on repo.
Gorton, Gary and Andrew Metrick, 2012, “Getting Up to Speed on the Financial
Crisis: A One Weekend-Reader’s Guide,” Journal of Economic Literature 50: 128–150.
http://faculty.som.yale.edu/garygorton/documents/GettingUpToSpeed_Jan-11-2012.pdf
Abstract:
All economists should be conversant with "what happened?" during the financial crisis of 200709. We select and summarize sixteen documents, including academic papers and reports from
regulatory and international agencies. This reading list covers the key facts and mechanisms
in the build-up of risk, the panics in short-term-debt markets, the policy reactions, and the real
effects of the financial crisis.
Gorton, Gary and Andrew Metrick, 2012, “Securitized Banking and the Run on
Repo,” Journal of Financial Economics 104: 425-451.
http://www.sciencedirect.com/science/journal/0304405X
Abstract:
The panic of 2007-2008 was a run on the sale and repurchase market (the repo market), which is
a very large, short-term market that provides financing for a wide range of securitization
activities and financial institutions. Repo transactions are collateralized, frequently
with securitized bonds. We refer to the combination of securitization plus repo finance as
"securitized banking" and argue that these activities were at the nexus of the crisis. We use a
novel data set that includes credit spreads for hundreds of securitized bonds to trace the path
of the crisis from subprime-housing related assets into markets that had no connection to housing.
We find that changes in the LIB-OIS spread, a proxy for counterparty risk, were strongly
correlated with changes in credit spreads and repo rates for securitized bonds. These changes
implied higher uncertainty about bank solvency and lower values for repo collateral. Concerns
about the liquidity of markets for the bonds used as collateral led to increases in repo haircuts,
that is the amount of collateral required for any given transaction. With declining asset values
and increasing haircuts, the US banking system was effectively insolvent for the first time
since the Great Depression.
Grace, Martin F., 2010, “The Insurance Industry and Systemic Risk: Evidence and
Discussion,” working paper, Georgia State University, Atlanta, GA.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1593645
28
Abstract:
The financial market events in September 2008 seem unprecedented in modern times. While
other systemically important events happened in the last thirty years affecting U.S.
markets, the one month turmoil and government response is without equal. As a result, insurance
industry economists have been dusting off dictionaries and looking up what systemic risk really
means. Further, there are other policy analysts who are linking the insurance industry to systemic
risk with a potential goal of changing the governmental level at which the entire industry is
regulated. Systemic risk and the role insurers play in the market is of concern to both state
regulators and Congress. This paper presents evidence regarding systemic effect of insurers and
will discuss this in light of the rationale for federal regulation of the insurance industry.
Group of Ten, 2001, Report on Consolidation in the Financial Sector (Basel, Switzerland:
Bank for International Settlements).
http://www.bis.org/publ/gten05.pdf
Group of Thirty, 2006. Reinsurance and International Financial Markets (Washington,
D.C.).
http://www.group30.org/images/PDF/Reinsurance%20and%20International%20Financial%20M
arkets.pdf
Haldane, Andrew G., 2012, “The Dog and the Frisbee,” speech delivered at Federal Bank of
Kansas City’s 36th Economic Policy Symposium, Jackson Hole, WY.
http://www.bis.org/review/r120905a.pdf?ql=1
Harrington, Scott E., 2009, “The Financial Crisis, Systemic Risk, and the Future of
Insurance Regulation,” The Journal of Risk and Insurance 76 (4): 785-819.
http://www.naic.org/documents/topics_white_paper_namic.pdf
Abstract:
This article considers the role of American International Group (AIG) and the insurance sector in
the 2007-2009 financial crisis and the implications for insurance regulation. Following an
overview of the causes of the crisis, I explore the events and policies that contributed to federal
government intervention to prevent bankruptcy of AIG and the scope of federal assistance to
AIG. I discuss the extent to which insurance in general poses systemic risk and whether a
systemic risk regulator is desirable for insurers or other nonbank financial institutions. The last
two sections of the article address the financial crisis's implications for proposed optional and/or
mandatory federal chartering and regulation of insurers and for insurance regulation in general.
Harrington, Scott E., 2011, “Insurance Regulation and the Dodd-Frank Act,” Networks
Financial Institute Policy Bried 2011-PB-01.
http://www.networksfinancialinstitute.org/Lists/Publication Library/Attachments/177/2011-PB01_Harrington.pdf
Abstract:
29
This paper discusses a number of key issues regarding implementation by the Financial Stability
Oversight Council (FSOC) and the Federal Insurance Office (FIO) of the Dodd-Frank Act's
provisions affecting insurance. The paper emphasizes the fundamental differences between
insurance and banking, including much lower potential for systemic risk and substantial market
discipline in insurance, and how those differences favor solvency regulation and guaranty
systems that reflect the distinctive features of each sector. The FSOC and FIO should carefully
consider those differences in their analyses of possibly systemically important insurance
companies and in the FIO's study and report to Congress on insurance regulation.
Harrington, Scott E. and Alan B. Miller, 2014, “Designation and Supervision of Insurance
SIFIs,” John H. Biggs and Matthew Richardson,eds., Modernizing Insurance Regulation
(New York: John Wiley).
http://onlinelibrary.wiley.com/doi/10.1002/9781118766798.ch8/summary
Summary
This chapter considers the broader issues of whether insurance entities pose systemic risk and the
challenges and potential adverse consequences of designating additional insurance entities for
enhanced supervision by the Federal Reserve. It begins with an overview of research and
analyses of whether insurance activities and entities pose systemic risk. The chapter then
summarizes the FSOC process for designating nonbank systemically important financial
institutions (SIFIs) and the Financial Stability Oversight Council's (FSOC) stated rationale for
designating American International Group (AIG) as systemically important. Three issues are
then briefly considered: (i) regulatory and compliance costs and potential undesirable market
disruptions from designation of insurance entities as SIFIs subject to enhanced supervision; (ii)
the design of enhanced capital requirements for insurer SIFIs; and (iii) the risk that designation
of insurer SIFIs would ultimately reduce market discipline by expanding “too big to fail” policy.
The concluding section reiterates the chapter's main arguments.
Hauslere, Gerd, 2004, “The Insurance Industry, Systemic Financial Stability, and Fair
Value Accounting,” Geneva Papers on Risk and Insurance: Issues and Practice 29: 63-70.
http://www.palgrave-journals.com/gpp/journal/v29/n1/abs/2500270a.html
Abstract:
The insurance industry has become more important for systemic financial stability. As a result,
the supervision and disclosure of financial risks of insurance companies need to be strengthened.
The insurance industry's increasing systemic importance also suggests that there is a need to
search for some middle ground in the discussion of fair value accounting to mitigate potentially
destabilizing financial volatility.
Helwege, Jean, 2009, “Financial Firm Bankruptcy and Systemic Risk,” Regulation 32
(Summer): 24-29.
Abstract:
Systemic risk is the risk that the financial system will fail to function properly because of
widespread distress. Failure of the system implies that capital will not be properly allocated and
good projects will not be undertaken. Such pervasive financial fragility may occur because one
30
firm's failure causes a cascade of failures throughout the system. Or systemic risk may wreak
havoc when a number of financial firms fail simultaneously, as in the Great Depression when
more than 9,000 banks failed. If regulators elect not to bail out a failed financial institution, the
alternative is to let it go bankrupt. Financial firm failures grab headlines and often generate a
sensation of panic and crisis, leading regulators such as the Fed and Treasury to conclude that
they must intervene. Regulators' desire to maintain stable, liquid, and orderly markets is best
satisfied by letting financial firms file for bankruptcy protection.
Helwege, Jean, 2010, “Financial Firm Bankruptcy and Systemic Risk,” International
Financial Markets, Institutions, and Money 20: 1-12.
http://www.sciencedirect.com/science/article/pii/S1042443109000511
Abstract:
Financial firm distress often leads to regulatory intervention, such as "too big to fail" (TBTF)
policies. Two oft-cited channels to justify TBTF are domino effects (counterparty risk) and the
effects of fire sales. We analyze the policy responses for avoiding systemic risk while
considering the role of these two factors. Prior bankruptcies suggest that cascades caused by
counterparty risk do not occur, as firms diversify their exposures. Instead, crises tend to be
symptomatic of common factors in financial firms' portfolios, which lead to widespread
instances of declining asset values and which are often misinterpreted as resulting from fire
sales.
Hendricks, Darryll, John Kambhu, and Patricia Mosser, 2007, “Systemic Risk and the
Financial System,” Federal Reserve Bank of New York Economic Policy Review 13: 65-80.
http://www.newyorkfed.org/research/epr/2007/EPRvol13n2.pdf
Hetzel, Robert L., 1991, “Too Big to Fail: Origins, Consequences, and Outlook,” FRB
Richmond Economic Review 77: 3-15.
http://www.richmondfed.org/publications/research/economic_review/1991/er770601.cfm
Abstract:
The policy of too big to fail arose in part from pressures created by the lack of satisfactory
bankruptcy arrangements for banks. It prevented market forces from closing banks and protected
all uninsured depositors of large banks from loss in the event of failure. The consequent risktaking behavior of banks produced the systemic instability in banking that the policy was
designed to prevent. It is debatable how the Deposit Insurance Reform Act of 1991 will affect
the timing of bank closures, the risk-taking behavior of banks, and the contraction of the banking
industry.
Heyde, Frank and Ulrike Neyer, 2010, “Credit Default Swaps and the Stability of the
Banking Sector,” International Review of Finance 10: 27-61.
http://onlinelibrary.wiley.com/doi/10.1111/j.1468-2443.2010.01104.x/abstract
Abstract:
This paper considers credit default swaps (CDSs) used for the transfer of credit risk within the
banking sector. The banks' motive to conclude these CDS contracts is to improve the
31
diversification of their credit risk. It is shown that these CDSs reduce the stability of the banking
sector in a recession. However, during a boom or in periods of moderate economic up- or
downturn, they may reduce this stability. The main reasons behind these negative impacts are
firstly, that banks are induced to increase their investment in an illiquid, risky credit portfolio,
and secondly, that these CDSs may create a possible channel of contagion.
Höring, Dirk, 2012, “Will Solvency II Market Risk Requirements Bite? The Impact of
Solvency II on Insurers’ Asset Allocation,” Geneva Papers on Risk and Insurance:
Issues and Practice 38: 250-273.
Abstract:
The European insurance industry is among the largest institutional investors in Europe.
Therefore, major reallocations in their investment portfolios due to the new risk-based economic
capital requirements introduced by Solvency II would cause significant disruptions in European
capital markets and corporate financing. This paper studies whether the new regulatory capital
requirements for market risk are a binding constraint for European insurers by comparing the
required market risk capital of the Solvency II standard model with the Standard & Poor's rating
model for a fictitious, but representative, European-based life insurer. The results show that for a
comparable level of confidence, the rating model requires 68 per cent more capital than the
standard model for the same market risks. Hence, Solvency II seems not to be a binding capital
constraint for market risk and thus would not significantly influence the insurance companies'
investment strategies.
Horton, Brent J., 2012, “When Does a Non-Bank Financial Company Pose a ‘Systemic
Risk”? A Proposal for Clarifying Dodd-Frank,” Journal of Corporation Law 37: 815-848.
Abstract:
This article discusses the origins and evolution of "systemic risk" as an idea, from the 1933
Banking Act, to the Depository Institutions Act of 1982, to the 1991 Federal Deposit Insurance
Corporation Improvement Act, and culminating with Dodd-Frank and Title II Liquidation, which
empowers the Treasury to appoint the Federal Deposit Insurance Corp (FDIC) as receiver for a
non-bank financial company (NBFC) in cases where allowing "its resolution under otherwise
applicable Federal or State law would have serious adverse effects on financial stability in the
US." It explains that while federal regulators were "cognizant that they needed to be more
specific," subsequent attempts via implementing regulations to clarify "systemic risk" fell short.
Next, this article explains that NBFCs will seek certainty as to the definition of "systemic risk" to
avoid being plucked from Chapter 11 and placed in Title II Liquidation. While Chapter 11 allows
for due process for both the NBFC and its creditors and counterparties, Title II Liquidation
grants to the FDIC nearly dictatorial powers.
Huang, Xin, Hao Zhou, and Haibin Zhu, 2009, “A Framework for Assessing the Systemic
Risk of Major Financial Institutions,” Journal of Banking and Finance 33: 2036-2049.
http://www.bis.org/publ/work281.htm
Abstract:
In this paper we propose a framework for measuring and stress testing the systemic risk of a
group of major financial institutions. The systemic risk is measured by the price of insurance
32
against financial distress, which is based on ex ante measures of default probabilities of
individual banks and forecasted asset return correlations. Importantly, using realized correlations
estimated from high-frequency equity return data can significantly improve the accuracy of
forecasted correlations. Our stress testing methodology, using an integrated micro-macro model,
takes into account dynamic linkages between the health of major U.S. banks and macrofinancial
conditions. Our results suggest that the theoretical insurance premium that would be charged to
protect against losses that equal or exceed 15 percent of total liabilities of 12 major U.S. financial
firms stood at $110 billion in March 2008 and had a projected upper bound of $250 billion in
July 2008.
Huang, Xin, Hao Zhou, and Haibin Zhu, 2012, “Systemic Risk Contributions,” Journal of
Financial Services Research 42: 55-83.
http://www.bis.org/repofficepubl/arpresearch201012.1.htm
Abstract:
We adopt a systemic risk indicator measured by the price of insurance against systemic financial
distress and assess individual banks’ marginal contributions to the systemic risk. The
methodology is applied using publicly available data to the 19 bank holding companies covered
by the U.S. Supervisory Capital Assessment Program (SCAP), with the systemic risk indicator
peaking around $1.1 trillion in March 2009. Our systemic risk contribution measure shows
interesting similarity to and divergence from the SCAP loss estimates under stress test scenarios.
In general, we find that a bank’s contribution to the systemic risk is roughly linear in its default
probability but highly nonlinear with respect to institution size and asset correlation.
Hull, J. and A. White, 2004, “Valuation of a CDO and an n-th to Default CDS Without
Monte Carlo Simulation,” Journal of Derivatives 12: 8-23.
Abstract:
Two fast procedures for valuing tranches of collateralized debt obligations and n-th to default
swaps are developed here. The procedures are based on a factor copula model of times to default
and are alter- natives to using fast Fourier transforms. One involves calculating the probability
distribution of the number of defaults by a certain time using a recurrence relationship; the other
involves using a "probability bucketing" numerical procedure to build up the loss distribution.
Many different copula models can be generated by using different distributional assumptions in
the factor model. The impact on valuations of default probabilities, default correlations, and a
correlation of recovery rates with default probabilities is shown. An examination of the market
pricing of index tranches indicates that a double t-distribution copula fits the prices reasonably
well.
Impavido, Gregorio and Ian Tower, 2009, “How the Financial Crisis Affects Pensions and
Insurance and Why the Impacts Matter,” IMF Working Paper No. 09/151, International
Monetary Fund, Washington, DC.
http://www.imf.org/external/pubs/ft/wp/2009/wp09151.pdf
Abstract:
This paper discusses the key sources of vulnerabilities for pension plans and insurance
companies in light of the global financial crisis of 2008. It also discusses how these institutional
33
investors transit shocks to the rest of the financial sector and economy. The crisis has re-ignited
the policy debate on key issues such as: 1) the need for countercyclical funding and solvency
rules; 2) the tradeoffs implied in marked based valuation rules; 3) the need to protect contributors
towards retirement from excessive market volatility; 4) the need to strengthen group supervision
for large complex financial institutions including insurance and pensions; and 5) the need to
revisit the resolution and crisis management framework for insurance and pensions.
Inui, K. and M. Kijima, 2005, “On the Significance of Expected Shortfall As a Coherent
Risk Measure,” Journal of Banking and Finance 29:853-864.
Abstract:
This article shows that any coherent risk measure is given by a convex combination of expected
shortfalls, and an expected shortfall (ES) is optimal in the sense that it gives the minimum value
among the class of plausible coherent risk measures. Hence, it is of great practical interest to
estimate the ES with given confidence level from the market data in a stable fashion. In this
article, we propose an extrapolation method to estimate the ES of interest. Some numerical
results are given to show the efficiency of our method.
International Association of Insurance Supervisors (IAIS), 2009, Systemic Risk and the
Insurance Sector (Basel, Switzerland).
International Association of Insurance Supervisors (IAIS), 2010, Position Statement on Key
Financial Stability Issues (Basel, Switzerland).
http://www.iaisweb.org/
International Association of Insurance Supervisors (IAIS), 2011, Insurance and Financial
Stability (Basel, Switzerland).
http://www.iaisweb.org/view/element_href.cfm?src=1/14102.pdf
Abstract:
This paper presents a supervisory perspective on the (re)insurance sector and on financial
stability issues. It analyses the sector’s role in the financial markets, including its interaction with
other financial institutions, and its impact on the real economy. In addition, the International
Association of Insurance Supervisors (IAIS) endeavours to clarify the rationale of its proposed
methodology to identify any institutions “whose disorderly failure, because of their size,
complexity and systemic interconnectedness, would cause significant disruptions to the wider
financial system and economic activity.”
International Association of Insurance Supervisors (IAIS), 2012a, Global Systemically
Important Insurers: Proposed Assessment Methodology (Basel, Switzerland).
http://www.iaisweb.org/
International Association of Insurance Supervisors (IAIS), 2012b, Reinsurance and
Financial Stability (Basel, Switzerland).
34
http://www.iaisweb.org/
International Monetary Fund (IMF), 2009, Global Financial Stability Report, Responding to
the Financial Crisis and Measuring Systemic Risks (Washington, D.C.).
http://www.imf.org/external/pubs/ft/gfsr/2009/01/
Executive Summary:
The global financial system remains under severe stress as the crisis broadens to include
households, corporations, and the banking sectors in both advanced and emerging market
countries. Shrinking economic activity has put further pressure on banks’ balance sheets as asset
values continue to degrade, threatening their capital adequacy and further discouraging fresh
lending. Thus, credit growth is slowing, and even turning negative, adding even more downward
pressure on economic activity. Substantial private sector adjustment and public support packages
are already being implemented and are contributing to some early signs of stabilization. Even so,
further decisive and effective policy actions and international coordination are needed to sustain
this improvement, to restore public confidence in financial institutions, and to normalize
conditions in markets. The key challenge is to break the downward spiral between the financial
system and the global economy. Promising efforts are already under way for the redesign of the
global financial system that should provide a more stable and resilient platform for sustained
economic growth.
Insurance Information Institute, 2011, Financial Services Fact Book (New York, NY).
Insurance Information Institute, 2012, Financial Services Fact Book (New York, NY).
Insurance Information Institute, 2013, Financial Services Fact Book (New York, NY).
Insurance Information Institute, 2014, Financial Services Fact Book (New York, NY).
http://www.iii.org/
Jones, Robert A. and Christophe Perignon, 2013, “Derivatives Clearing, Default Risk, and
Insurance,” Journal of Risk and Insurance 80: 373-400.
Abstract
Using daily data on margins and variation margins for all clearing members of the Chicago
Mercantile Exchange, we analyze the clearing house exposure to the risk of default by clearing
members. We find that the major source of default risk for a clearing member is proprietary
trading rather than trading by customers. Additionally, we show that extreme losses suffered by
important clearing firms tend to cluster, which raises systemic risk concerns. Finally, we discuss
how private insurance could be used to cover the loss from defaults by clearing members.
Kane, Edward J., 2014, “Insurance Contracts and Derivatives that Substitute for Them:
How and Where Should Their Systemic and Nonperformance Risks Be Regulated,”
Networks Financial Insitute Policy Brief No. 2014-PB-03.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2419617
35
Abstract:
Traditionally, individual states have shared responsibility for regulating the US insurance
industry. The Dodd-Frank Act changes this by tasking the Federal Reserve with regulating the
systemic risks that particularly large insurance organizations might pose and assigning the
regulation of swap-based substitutes for insurance and reinsurance products to the SEC and
CFTC. This paper argues that prudential regulation of large insurance firms and weaknesses in
federal swaps regulation could reduce the effectiveness of state-based systems for protecting
policyholders and taxpayers from nonperformance in the insurance industry. Swap-based
substitutes for traditional insurance and reinsurance contracts offer protection sellers a way to
transfer responsibility for guarding against nonperformance into potentially less-effective hands.
The CFTC and SEC lack the focus, expertise, experience, and resources to manage adequately
the ways that swaps transactions can affect US taxpayers’ equity position in global safety nets,
while regulators at the Fed refuse to recognize that conscientiously monitoring accounting capital
at financial holding companies will not adequately protect taxpayers and policyholders until and
unless it is accompanied by severe penalties for managers that willfully hide their firm's
exposure to destructive tail risks.
Kaufman, George G. and Kenneth E. Scott, 2003, “What is Systemic Risk, and Do Bank
Regulators Retard or Contribute to It?”, The Independent Review 7 (3): 371-391.
http://www.independent.org/publications/tir/
Abstract:
Clusterings of bank failures occur frequently, but do they reflect systemic risk? Without a
theoretically coherent and empirically grounded conception of systemic risk, bank regulators run
the risk of exacerbating it, as the banking history of the past century has demonstrated.
Kessler, Denis, 2014, “Why (Re)Insurance Is Not Systemic,” Journal of Risk and Insurance,
forthcoming.
http://onlinelibrary.wiley.com/doi/10.1111/j.15396975.2013.12007.x/abstract?deniedAccessCustomisedMessage=&userIsAuthenticated=false
Abstract:
The traditional model of (re)insurance lacks the elements that make a financial institution
systemically important: risks are effectively pulverized; liabilities tend to be prefunded, which
eliminates most of the leverage in the traditional sense; and active asset-liability management
reduces most of the liquidity mismatch that traditionally propagates systemic risk. (Re)insurers
that have stuck to this traditional business model have successfully weathered the crisis, even
playing a stabilizing role. Unfortunately, this is not sufficiently recognized in the current
IAIS/FSB1 debate on assessing systemic risk in the (re)insurance sector.
Klein, Robert W., 2012, “Principles for Insurance Regulation: An Evaluation of Current
Practices and Potential Reforms,” Geneva Papers on Risk and Insurance—Issues and
Practice 37: 175–199.
http://www.palgrave-journals.com/gpp/journal/v37/n1/abs/gpp20119a.html
Abstract:
36
The recent financial crisis and its cascading effects on the global economy have drawn increased
attention to the regulation of financial institutions including insurance companies. While many
observers would argue that insurance companies were not significant contributors to the crisis, the
role of insurance companies in the financial economy and their potential vulnerability to systemic
risk have become matters of considerable interest to policy-makers and regulators. In this context,
this paper examines the basic economic principles that should govern the regulation of insurance
and employs these principles in assessing current regulatory practices and potential reforms.
Specifically, it articulates the basic rationale for insurance regulation, which is the remediation of
market failures where regulation can enhance social welfare. In insurance, the principal market
failures that warrant regulatory intervention are severe asymmetric information problems and
principal-agent conflicts that could lead some insurance companies to incur excessive financial
risk and/or engage in abusive market practices that harm consumers. This provides an economic
basis for the regulation of insurers’ financial condition and market conduct. At the same time, the
regulatory measures that are employed to correct market failures should be efficient and effective.
Judged against these principles, the systems for solvency and market conduct regulation in the
United States warrant significant improvement. There appears to be little or no justification for
regulating insurance rates in competitive markets and the states should move forward with full
deregulation of insurance prices. The EU appears to be much farther ahead in terms of
implementing best practices in the regulation of insurers’ financial condition under its Solvency II
initiative. It is also much closer to the desirable goal of full price deregulation than the United
States.
Koijen, Ralph S.J. and Motohiro Yogo, 2014, “The Cost of Financial Frictions for Life
Insurers,” Chicago Booth Research Paper No. 12-30, University of Chicago, Chicago, IL.
http://www.nber.org/papers/w18321
Abstract:
During the financial crisis, life insurers sold long-term policies at deep discounts relative to
actuarial value. The average markup was as low as −19 percent for annuities and −57 percent for
life insurance. This extraordinary pricing behavior was due to financial and product market
frictions, interacting with statutory reserve regulation that allowed life insurers to record far less
than a dollar of reserve per dollar of future insurance liability. We identify the shadow cost of
capital through exogenous variation in required reserves across different types of policies. The
shadow cost was $0.96 per dollar of statutory capital for the average company in November
2008.
Lehmann, Axel P. and Daniel M. Hofmann, 2010, “Lessons Learned from the Financial
Crisis for Risk Management: Contrasting Developments in Insurance and Banking,”
Geneva Papers on Risk and Insurance: Issues and Practice 35: 63-78.
http://www.palgrave-journals.com/gpp/journal/v35/n1/abs/gpp200938a.html
Abstract:
The article analyses implications for risk management in insurance arising from the current
financial crisis. After a brief comparison of the insurance to the banking world, we discuss the
root causes of the current financial crisis with a particular focus on risk management and
incentives. Against the backdrop of this discussion, lessons are derived from an insurance risk
management point of view. In particular, the article pleads for a pronounced external and
37
forward-looking approach to supplement the traditional methodology, which tends to be more
inward-looking and ultimately backward-oriented.
Lin, Yijia J., Sheen Liu, and Jifeng Yu and Manferd O. Peterson, 2014, “Reinsurance
Networks and Their Impact on Reinsurance Decisions: Theory and Empirical Evidence,”
Journal of Risk and Insurance, forthcoming.
http://onlinelibrary.wiley.com/doi/10.1111/jori.12032/abstract?deniedAccessCustomisedMessag
e=&userIsAuthenticated=false
Abstract:
This article investigates the role of reinsurance networks in an insurer's reinsurance purchase
decision. Drawing on network theory, we develop a framework that delineates how the pattern of
linkages among reinsurers determines three reinsurance costs (loadings, contagion costs, and
search and monitoring costs) and characterizes an insurer's optimal network structure. Consistent
with empirical evidence based on longitudinal data from the U.S. property and casualty
insurance industry, our model predicts an inverted U-shaped relationship between the insurer's
optimal percentage of reinsurance ceded and the number of its reinsurers. Moreover, we find that
a linked network may be optimal ex ante even though linkages among reinsurers may spread
financial contagion, supporting the model's prediction regarding social capital benefits associated
with network cohesion. Our theoretical model and empirical results have implications for other
networks such as loan sale market networks and over-the-counter dealer networks.
MacMinn, Richard and James Garven, 2000, “On Corporate Insurance,” in Georges
Dionne, ed., Handbook of Insurance (Boston: Kluwer Academic Publishers).
http://link.springer.com/chapter/10.1007/978-94-010-0642-2_16
Abstract:
Although insurance contracts are regularly purchased by corporations and play an important role
in the management of corporate risk, only recently has this role received much attention in the
finance literature. This paper provides a formal analytic survey of recent theoretical
developments in the corporate demand for insurance. Insurance contracts are characterized as
simply another type of financial contract in the nexus of contracts that comprise the corporation.
The model developed here focuses specifically on the efficiency gains that can be derived from
using corporate insurance contracts to reduce bankruptcy costs, agency costs, and tax costs.
Madan, Dilip B. and Wim Schoutens, “Systemic Risk Tradeoffs and Option Prices,”
Insurance: Mathematics and Economics 52: 222-230.
http://www.sciencedirect.com/science/article/pii/S0167668712001692
Abstract:
Two new indices for financial diversity are proposed. The first is aggregative and evaluates
distance from a single factor driving returns. The second evaluates how fast correlation with a
stock rises as the stock falls. Both measures are here risk neutral. The CRI is also compared with
coVaR. These measures are negatively related and so focus attention on different aspects of
systemic risk. Unlike the coVaR focused on expected losses the CRI measures the risks of
increased correlation and lack of diversity in activities. The CRI also declined consistently for
38
AIG and LEH prior to their bankruptcies indicating that the market was active in decorrelating
itself from these firms.
Merrill, Craig B., Taylor D. Nadauld, and Philip E. Strahan, 2014, “Final Demand for
Structured Finance Securities,” working paper, Brigham Young University, Provo, Utah,
USA.
Abstract:
The issuance of structured finance securities boomed during the run-up to the Financial Crisis.
Existing explanations for this growth emphasize supply-side factors. Demand, however, was also
encouraged by efforts to avoid regulatory capital requirements. We show that life insurance
companies exposed to unrealized losses from low interest rates in the early 2000s increased their
holdings of highly rated securitized assets, assets which offered the highest yield per unit of
required capital. The results are only evident in accounts subject to capital requirements and at
firms with low levels of ex ante capital, consistent with regulatory distortions fueling the demand
for securitized assets.
National Association of Insurance Commissioners (NAIC), 2011, Capital Markets Special
Report (New York, NY: NAIC Capital Markets Group).
http://www.naic.org/capital_markets_archive.htm
National Conference of Insurance Guaranty Funds (NCIGF), 2011, “Testimony for the
Record on the National Conference of Insurance Guaranty Funds Before the House
Financial Services Subcommittee on Insurance, Housing, and Community Opportunity,”
Washington, DC, November 16, 2011 (http://www.ncigf.org/).
Neale, Faith R., Pamela P. Drake, Patrick Schorno, and Elia Semann, 2012,
“Insurance and Interconnectedness in the Financial Services Industry,” working
paper, University of North Carolina Charlotte, Charlotte, NC.
Neyer, J. Steven, 1990, “The LMX Spiral Effect,” Best’s Review 91 (July): 62ff.
Nijskens, Rob, and Wolf Wagner. 2011, "Credit Risk Transfer Activities and Systemic
Risk: How Banks Became Less Risky Individually But Posed Greater Risks To The
Financial System At The Same Time," Journal of Banking & Finance 35: 1391-1398.
http://www.sciencedirect.com/science/article/pii/S0378426610003821
A main cause of the crisis of 2007–2009 is the various ways through which banks have
transferred credit risk in the financial system. We study the systematic risk of banks before the
crisis, using two samples of banks respectively trading Credit Default Swaps (CDS) and issuing
Collateralized Loan Obligations (CLOs). After their first usage of either risk transfer method, the
share price beta of these banks increases significantly. This suggests the market anticipated the
risks arising from these methods, long before the crisis. We additionally separate this beta effect
39
into a volatility and a market correlation component. Quite strikingly, this decomposition shows
that the increase in the beta is solely due to an increase in banks’ correlations. Thus, while banks
may have shed their individual credit risk, they actually posed greater systemic risk. This creates
a challenge for financial regulation, which has typically focused on individual institutions.
O’Brien, Christopher, 2010, “Insurance Regulation and the Global Financial Crisis: A
Problem of Low Probability Events,” Geneva Papers on Risk and Insurance: Issues and
Practice 35: 35-52.
http://www.palgrave-journals.com/gpp/journal/v35/n1/abs/gpp200936a.html
Abstract:
We consider probabilistic approaches and stress tests as methods for regulators to set the
minimum solvency margin for insurers. Each method has advantages and disadvantages. We
assess the implications of the global financial crisis for each method, concentrating on life
insurers. We have concerns that the probabilities used in probabilistic approaches are not robust.
Regulators may find it beneficial to focus on the use of stress tests, although there are lessons to
learn from the global financial crisis about the design and use of such tests.
O’Neill, William, Nilam Sharma, and Michael Carolan, 2009, “Coping with the CDS
Crisis: Lessons Learned from the LMX Spiral,” Journal of Reinsurance 16: 1-34.
Organization for Economic Co-operation and Development (OECD), 2003, Insurance and
Expanding Systemic Risks, Policy Issues in Insurance, No. 5 (Washington, DC).
http://www.oecd-ilibrary.org/finance-and-investment/insurance-and-expanding-systemicrisks_9789264102910-en
Abstract:
This comprehensive study responds to the growing concerns of economic, financial, political and
social actors regarding the ever increasing exposure to new expanding risks. These risks are
particularly related to natural disaster/environment pollution, technology, health and terrorism.
For insurers the difficulty is encountered in adequately appraising and covering the potential
liability stemming from these risks. It also sketches out some policy recommendations for
decision makers in governments and in the business community on how to limit, prevent and
manage such risks. In this perspective it will constitute a unique reference work for the attention
of both OECD countries and emerging economies.
Organization for Economic Co-operation and Development (OECD), 2011, The Impact of
the Financial Crisis on the Insurance Sector and Policy Responses, Policy Issues in
Insurance, No. 13 (Washington, DC).
http://www.oecd.org/daf/ca/corporategovernanceprinciples/theimpactofthefinancialcrisisontheins
urancesectorandpolicyresponses.htm
Abstract:
This special report assesses the impact of the crisis on the insurance sector and reviews policy
responses within OECD countries. It is based to a large extent on a quantitative and qualitative
questionnaire that was circulated to OECD countries in 2009. The report shows that generally the
40
insurance sector demonstrated resilience to the crisis, though with some variation across the
OECD, and concludes with a number of policy conclusions.
Oxera, 2007, Insurance Guarantee Schemes in the EU, Final Report Prepared for European
Commission DG Internal Market and Services (Brussels, Belgium).
http://www.oxera.com/Oxera/media/Oxera/Insurance-guarantee-schemes-in-the-EU.pdf?ext=.pdf
Oxera, 2010, “Insurance Guarantee Schemes: Challenges for Cross-Border Insurance,”
Oxera Agenda (Brussels, Belgium) (www.oxera.com).
http://www.oxera.com/Latest-Thinking/Agenda/2010/Insurance-guarantee-schemes-challengesfor-cross.aspx
Park, Sojung C. and Xiaoying Xie, 2014, “Reinsurance and Systemic Risk: The Impact of
Reinsurer Downgrading on Property-Casualty Insurers,” Journal of Risk and Insurance,
forthcoming.
Paulson, Anna, Thanases Plestis, Richard Rosen, Robert McMenamin and Zain MoheyDean, 2014, “Assessing the Vulnerability of the U.S. Life Insurance Industry,” in John H.
Biggs and Matthew Richardson,eds., Modernizing Insurance Regulation (New York: John
Wiley).
Peirce, Hester, 2014, “Securities Lending and the Untold Story in the Collapse of AIG,”
George Mason University Mercatus Center Working Paper No. 14-12, George Mason
University, Fairfax, VA.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2435161
Abstract:
American International Group, Inc. (AIG), a large insurance company, received a massive
bailout during the financial crisis in response to difficulties centered on the company’s
multifaceted exposure to residential mortgage-backed securities. The company is back on its feet,
albeit in more streamlined form and with a new overseer — the Federal Reserve. This paper
focuses on a piece of the AIG story that is rarely told — the role of the company’s securitieslending program in imperiling the company and some of its insurance subsidiaries. The paper
argues that regulatory responses to AIG have been inapt. AIG did not need another regulator, but
better risk management. The markets would have conveyed that message clearly had regulators
not intervened to ensure AIG’s survival. This paper adds the missing piece to the AIG story in an
effort to challenge the notion that more regulatory oversight for companies like AIG will prevent
future crises.
Pimbley, Joseph, 2012, “Bond Insurers,” Journal of Applied Finance 22: 35-42.
Abstract:
41
Bond insurance was a small but sophisticated sector of the broader insurance industry.
Conceived and created in the 1970s, bond insurance penetrated more than half of the entire US
municipal bond market in the 1990s. This article explains bond insurance, its rise to prominence,
and its sudden and shocking collapse. A diversifying foray of the bond insurers into structured
finance risk in the years prior to 2007 is a dominant cause of these firms' failures. Yet the larger
story is the manner in which business imperatives, rating agencies, and regulators enabled and
encouraged all bond insurers to pursue the same catastrophic strategy. The uniformity of strategy
and capital and risk assessment created the "systemic risk" of high correlation among bond
insurers.
Pozsar, Richard, Tobias Adrian, Adam Ashcraft, and Hayley Boesky, 2010, “Shadow
Banking,” Federal Reserve Bank of New York Staff Report No. 458 (New York: NY).
http://www.newyorkfed.org/research/staff_reports/sr458.html
Abstract:
The rapid growth of the market-based financial system since the mid-1980s changed the nature
of financial intermediation. Within the market-based financial system, “shadow banks” have
served a critical role. Shadow banks are financial intermediaries that conduct maturity, credit,
and liquidity transformation without explicit access to central bank liquidity or public sector
credit guarantees. Examples of shadow banks include finance companies, asset-backed
commercial paper (ABCP) conduits, structured investment vehicles (SIVs), credit hedge funds,
money market mutual funds, securities lenders, limited-purpose finance companies (LPFCs), and
the government-sponsored enterprises (GSEs). Our paper documents the institutional features of
shadow banks, discusses their economic roles, and analyzes their relation to the traditional
banking system. Our description and taxonomy of shadow bank entities and shadow bank
activities are accompanied by “shadow banking maps” that schematically represent the funding
flows of the shadow banking system.
Reddemann, Sebastian, Tobias Basse, and Johann-Matthias Graf. von der Schulenburg,
2010, “On the Impact of the Financial Crisis on the Dividend Policy of the European
Insurance Industry,” Geneva Papers on Risk and Insurance: Issues and Practice 35: 53-62.
Abstract：
The financial crisis has led to controversial discussions about the capital base of the European
insurance industry. Dividend cuts have been suggested to preserve capital. However, some
observers seem to fear that investors could interpret a reduction of dividends as a sign of future
problems. The empirical evidence reported here does not indicate that dividend smoothing or
dividend signaling are relevant economic phenomena examining the dividend policy of the
European insurance industry. Therefore, insurance companies should not be too concerned about
the negative consequences of dividend cuts.
Rochet, Jean-Charles and Jean Tirole, 1996, “Interbank Lending and Systemic Risk,”
Journal of Mondey, Credit, and Banking 28: 733-762.
Abstract
：
Systemic risk refers to the propagation of a bank's economic distress to other economic agents
42
linked to that bank through financial transactions. Banking authorities often prevent systemic
risk through an implicit insurance of interbank claims, or by reducing interbank transactions and
centralizing banks' liquidity management. This paper investigates whether the flexibility afforded
by decentralized bank interactions can be preserved while protecting the central banks from the
necessity of conducting undesired rescue operations. It develops a model in which
decentralized interbank leading is motivated by peer monitoring. In this context, the paper
derives the optimal prudential rules, and, in particular, looks at the impact
of interbank monitoring on the solvency and liquidity ratios of borrowing and lending banks.
Last, it provides conditions which a Too Big To Fail policy is or is not justified and studies the
possibility of propagation of a bank's liquidity shock throughout the financial system.
Safa, M. Faisal, M. Kabir Hassan, and Neal C. Maroney, 2013, “AIG’s Announcements,
Fed’s Innovation, Contagion, and Systemic Risk in the Financial Industries,” Applied
Financial Economics 23: 1337-1348.
Abstract:
We examine the effects of the American International Group, Inc.’s (AIG's) loss announcements
and the Federal Reserve's subsequent innovation in the financial sector. Analysis of seemingly
unrelated regression on the returns of four financial industries – banking, insurance, brokerage
firms and savings and loan institutions (S&Ls) for the period 5 September 2007 to 31 December
2008 reveals that, the Federal Reserve's announcements on 16 September 2008 and on 8 October
2008 to pledge $85 billion and $37.8 billion, respectively, to save the AIG, have the most impact
on the financial industries. All four industries are sensitive towards shocks in short- and long-run
interest rate returns and market returns. We find evidence of significant contagion effect between
insurance and banking industries and incremental systemic risk in all financial industries after
the bailout by the Federal Reserve. We do not find any significant evidence supporting the
Federal Reserve's perception of AIG to be too-big-to-fail.
Schwartz, Steven L., 2008, “Systemic Risk,” Georgetown Law Journal 97: 194-249.
Abstract:
We examine the effects of the American International Group, Inc.’s (AIG's) loss announcements
and the Federal Reserve's subsequent innovation in the financial sector. Analysis of seemingly
unrelated regression on the returns of four financial industries – banking, insurance, brokerage
firms and savings and loan institutions (S&Ls) for the period 5 September 2007 to 31 December
2008 reveals that, the Federal Reserve's announcements on 16 September 2008 and on 8 October
2008 to pledge $85 billion and $37.8 billion, respectively, to save the AIG, have the most impact
on the financial industries. All four industries are sensitive towards shocks in short- and long-run
interest rate returns and market returns. We find evidence of significant contagion effect between
insurance and banking industries and incremental systemic risk in all financial industries after
the bailout by the Federal Reserve. We do not find any significant evidence supporting the
Federal Reserve's perception of AIG to be too-big-to-fail.
Schwarcz, Daniel and Steven L. Schwarcz, 2014, “Regulating Systemic Risk in Insurance,”
University of Chicago Law Review 81: .
43
Schwarcz, Daniel and Steven L. Schwarcz, 2015, “Anticipating New Sources of Systemic
Risk in Insurance,” in Andromachi Georgosouli and Miriam Goldby, eds., Systemic Risk
and the Future of Insurance Regulation (Abington, UK: Routledge).
Schwartzman, Joy A., 2008, “The Game of ‘Pass the Risk’: Then and Now,” in Risk
Management: The Current Financial Crisis, Lessons Learned and Future Implications
(Schaumburg, IL: The Society of Actuaries).
https://www.soa.org/library/essays/rm-essay-2008-schwartzman.aspx
Description:
Financial crises are nothing new. What is unique and sobering is the far greater speed with which
the current situation has evolved from a weakening of the U.S. housing market into a full-blown,
global economic meltdown. Also new this time is how quickly the fallout spread beyond the
financial sector into all areas of the economy. Advanced communications and information
technologies are creating an era of greater risk with more serious and far-reaching consequences
when compared with even the recent past.
Shenai, Siddharth Bhaskar, Randolph B. Cohen, and Daniel Bergstresser, 2010, “Financial
Guarantors and the 2007-2009 Credit Crisis,” working paper, Harvard Business School,
Cambridge, MA.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1571627
Abstract:
More than half of the municipal bonds issued between 1995 and 2009 were sold with bond
insurance. During the credit crisis the perceived credit quality of the financial guarantors fell, and
yields on insured bonds exceeded yields on equivalent uninsured issues. It does not appear that
either property and casualty insurers or open-end municipal mutual funds were dumping insured
bonds; analysis of holdings data indicates that their propensity to sell bonds was unusually low
for the issues insured by troubled insurers. At least on a bond-by-bond basis, the yield inversion
phenomenon is also not explained by the rapid liquidation of Tender Option Bond (TOB)
programs, which disproportionately held insured issues. Finally, during the recent crisis the
insured bonds have become significantly less liquid than uninsured municipal debt.
Slijkerman, Jan Frederik, 2006, “Insurance Sector Risk,” working paper, Tingergen
Institute, Erasmus University, Rotterdam, the Netherlands.
http://papers.tinbergen.nl/06062.pdf
Abstract:
We model and measure simultaneous large losses of the market value of insurers to understand
the impact of shocks on the insurance sector. The downside risk of insurers is explicitly modeled
by common and idiosyncratic risk factors. Since reinsurance is important for the capacity of
insurers, we measure risk dependence among European insurers and reinsurers. The results point
to a relatively low insurance sector wide risk. Dependence among insurers is higher than among
reinsurers.
44
Slijkerman, Jan Frederik, Dirk Schoenmaker, and Casper G. de Vries, 2013, “Systemic
Risk and Diversification across European Banks and Insurers,” Journal of Banking and
Finance 37: 773-785.
Abstract：
The mutual and cross company exposures to fat-tail distributed risks determine the potential
impact of a financial crisis on banks and insurers. We examine the systemic interdependencies
within and across the European banking and insurance sectors during times of stress by means of
extreme value analysis. While insurers exhibit a slightly higher interdependency in comparison
with banks, the interdependency across the two sectors turns out to be considerably lower. This
suggests that downside risk can be lowered through financial conglomeration.
Standard & Poor’s, 2012, Industry Surveys: Banking (New York, NY).
Standard & Poor’s, 2012, Industry Surveys: Insurance – Life & Health (New York, NY).
Swiss Re, 2001, Reinsurance – A Systemic Risk? Sigma No. 5/2003 (Zurich, Switzerland).
Tobias, Adrian and Adam B. Ashcraft, 2012, “Shadow Banking: A Review of the
Literature,” FRB of New York Staff Report No. 580.
http://www.newyorkfed.org/research/staff_reports/sr580.pdf
Abstract:
We provide an overview of the rapidly evolving literature on shadow credit intermediation. The
shadow banking system consists of a web of specialized financial institutions that conduct credit,
maturity, and liquidity transformation without direct, explicit access to public backstops. The
lack of such access to sources of government liquidity and credit backstops makes shadow banks
inherently fragile. Much of shadow banking activities is intertwined with the operations of core
regulated institutions such as bank holding companies and insurance companies, thus creating a
source of systemic risk for the financial system at large. We review fundamental reasons for the
existence of shadow banking, explain the functioning of shadow banking institutions and
activities, discuss why shadow banks need to be regulated, and review the impact of recent
reform efforts on shadow banking credit intermediation.
Tobias, Adrian, Adam B. Ashcraft, and Nicola Cetorelli, 2013, “Shadow Bank
Monitoring,” FRB of New York Staff Report No. 638.
http://www.newyorkfed.org/research/staff_reports/sr638.pdf
Abstract:
We provide a framework for monitoring the shadow banking system. The shadow banking
system consists of a web of specialized financial institutions that conduct credit, maturity, and
liquidity transformation without direct, explicit access to public backstops. The lack of such
access to sources of government liquidity and credit backstops makes shadow banks inherently
fragile. Shadow banking activities are often intertwined with core regulated institutions such as
bank holding companies, security brokers and dealers, and insurance companies. These
45
interconnections of shadow banks with other financial institutions create sources of systemic risk
for the broader financial system. We describe elements of monitoring risks in the shadow
banking system, including recent efforts by the Financial Stability Board.
Trainar, Philippe, 2011, “Assurance, Stabilite Financiere, et Risque Systemique (Insurance,
Financial Stability and Systemic Risk),” Revue d'Economie Financiere 101 : 29-35.
http://www.aef.asso.fr/allparution.jsp?prm=9
Abstract:
The collapse of the US monoliners and the rescue of AIG by the US government may have given
the impression that we would have finally had the proof of the systemic nature of insurance. This
conclusion relies on a twin misleading argumentation: should insurance be a victim of a systemic
crisis does not allow us to conclude that it is systemic; if an insurer is at the epicentre of a
systemic shock, because of its banking or quasi-banking activities, does not allow us to conclude
that insurance operations are systemic. As demonstrated in this article, insurance operations are
not, by nature, systemic. That does not mean that the failure of a big insurer would not constitute
a big economic shock, as would the default of a automaker or of whatever big company. This
observation has important consequences for the design of an optimal insurance supervision and
of its articulation with banking supervision. Of course, a significant financial shock does not
constitute, per se, a systemic risk and one should not substitute one for the other, especially with
regard to prudential supervision.
United States, Board of Governors of the Federal Reserve System, 2011, Flow of Funds
Accounts of the United States: 2005-2010 (Washington, DC).
http://www.federalreserve.gov/releases/z1/20110310/annuals/a2005-2010.pdf
United States, Department of Commerce, Bureau of Economic Analysis (BEA), 2010,
National Economic Accounts (Washington, DC).
http://bea.gov/national/nipaweb/Index.asp.
United States, Department of the Treasury, Financial Stability Oversight Council (FSOC),
2012, 2012 Annual Report (Washington, DC).
http://www.treasury.gov/initiatives/fsoc/studies-reports/Pages/2014-Annual-Report.aspx
United States, Department of the Treasury, Financial Stability Oversight Council (FSOC),
2012, 2013 Annual Report (Washington, DC).
http://www.treasury.gov/initiatives/fsoc/studies-reports/Pages/2014-Annual-Report.aspx
United States, Department of the Treasury, Financial Stability Oversight Council (FSOC),
2012, 2014 Annual Report (Washington, DC).
http://www.treasury.gov/initiatives/fsoc/studies-reports/Pages/2014-Annual-Report.aspx
46
Van Lelyveld, Iman, Franka Liedorp, and Manuel Kampman, 2011, “An Empirical
Assessment of Reinsurance Risk,” Journal of Financial Stability 7: 191-203.
http://ideas.repec.org/p/dnb/dnbwpp/201.html
Abstract:
We analyze the effect of failing reinsurance cover on the stability of Dutch insurers. As insurers
often reinsure themselves with other (re)insurers, a firm's loss could spread contagiously through
the sector. Using a unique and confidential data set on reinsurance exposures, we gain insight
into the reinsurance market structure and perform a scenario analysis to measure contagion risks.
Considering entities on a standalone basis, we find no evidence of systemic risk in the
Netherlands, even if multiple reinsurance companies fail simultaneously. At group level our
analysis points to the contagion risk of in-house reinsurance structures, given that such inhouse reinsurance parties are generally not higher capitalized than other group members.
Vaughan, Theresa M., 2009, “The Economic Crisis and Lessons from (and for) U.S.
Insurance Regulation,” Journal of Insurance Regulation 28: 3–18.
http://www.naic.org/documents/cipr_jir_vaughan.pdf
Abstract:
Policymakers and scholars are asking what role regulation played in creating the recent financial
turmoil, and how the structure of financial services regulation should change to prevent similar
financial crises in the future. Policymakers argue the U.S. needs an increased focus on systemic
risk and a resolution authority for systemically risky institutions. While the final outcome is still
uncertain, it is clear that the structure of U.S. financial services regulation will change. Much of
that change will address issues broader than or outside the scope of insurance regulation, but
some of it will inevitably interact with insurance regulation. This article summarizes theories that
are often used to explain regulatory failure and examines the unique structure of U.S. insurance
regulation within the context of those theories.
Vignial-Denain, Cecile, 2003, “Insurance and Expanding Systemic Risks,” Financial
Market Trends 85: 145-162.
http://search.proquest.com.libproxy.temple.edu/docview/224600558?accountid=14270
Abstract:
The OECD has just released an in-depth analysis on the assessment, management and
compensation of the so-called expanded systemic risks to which enterprises and insurers are
exposed. This comprehensive study responds to the growing concerns of economic, financial,
political and social actors regarding the ever increasing exposure to emerging risks.
These risks are in particular related to natural disaster/environmental pollution, technology,
health and terrorism. Appraising adequately and covering the potential liability stemming from
these risks is a challenging task for insurers. The report sketches out some policy
recommendations for decision makers in governments and in the business community on how to
prevent, limit and manage such risks. This article presents the authors' introduction to the report,
which describes the background of the study as well as the main issues it addresses.
Wagner, Wolf, 2010, "Diversification at Financial Institutions and Systemic Crises," 2010,
47
Journal of Financial Intermediation 19: 373-386.
http://www.sciencedirect.com/science/article/pii/S1042957309000345
Abstract:
It is widely believed that diversification at financial institutions benefits the stability of
the financial system. This paper shows that it also entails a cost: even
though diversification reduces each institution's individual probability of failure, it
makes systemic crises more likely. When systemic crises induce additional costs (over and above
individual failures), full diversification is no longer desirable as a result and the optimal degree
of diversification may be arbitrarily low. We show that the analysis can be extended
beyond diversification, such as to interbank insurance and financial integration.
Wallison, Peter J. and Charles W. Calomiris, 2008, “The Last Trillion Dollar
Commitment: The Destruction of Fannie Mae and Freddie Mac,” American Enterprise
Institute Financial Outlook Series (Washington, DC).
http://www.iijournals.com/doi/abs/10.3905/JSF.2009.15.1.071#sthash.KzUtmNfE.dpbs
Abstract:
The government takeover of Fannie Mae and Freddie Mac was necessary because of their
massive losses on more than $1.6 trillion of subprime and Alt-A investments, almost all of which
were added to their single-family book of business between 2005 and 2007. The most plausible
explanation for the sudden adoption of this disastrous course-disastrous for them and for the U.S.
financial markets-is their desire to retain the support of Congress after their accounting scandals
in 2003 and 2004 and the challenges to their business model that ensued. Although the strategy
worked-Congress did not adopt strong government-sponsored enterprise (GSE) reform
legislation until the Republicans demanded it as the price for Senate passage of a housing bill in
July 2008-it led inevitably to the government takeover and the enormous junk loan losses still to
come. Now that the federal government has been required to take effective control of
Fannie and Freddie and to decide their fate, it is important to understand the reasons for their
financial collapse-what went wrong and why. That is the purpose of this article.
Wang, Shaun S., John A. Major, Hucheng (Charles) Pan, and Jessica W.K. Leong, 2011,
"U.S. Property-Casualty: Underwriting Cycle Modeling and Risk Benchmarks," Variance
5: 91-114.
http://www.ermsymposium.org/2011/pdf/CP_Strategic-Wang-Major-Pan-Leong.pdf
Abstract:
The risk benchmarks and underwriting cycle models presented here can be used by insurers in
their enterprise risk management models. We analyze the historical underwriting cycle and
develop a regime-switching model for simulating future cycles, and show its superiority to an
utoregressive approach. We compute benchmarks for pricing and reserving risks by line of
business and by industry segments (large national, super regional, and small regional). We also
compute the historical correlation of the loss ratio, as well as the correlation of changes in the
reserve estimate between lines of business.
Weber, Rolf H. and Valerie Menoud, 2007, “Systemic Risks as a Topic of Financial
Conglomerates’ Prudential Supervision,” Banking & Finance Law Review 22: 377-403.
48
Abstract:
In the era of globalization, financial sectors are not left behind: Cross-border and crosssector financial institutions can increasingly be found in the banking, insurance and security
trading landscape. The impact of such large and complex groups on the financial system,
particularly in terms of systemic risks, raises several regulatory concerns. This article focuses on
the particular case of financial conglomerates and attempts to assess the recent international and
European legal framework addressing their supervision. The authors critically examine the
set of regulatory responses dealing directly or indirectly with systemic risks and suggest ancillary
issues that need to be further tackled in the financial conglomerates supervision discussions.
Weiss, Gregor N.F. and Janina Muhlnickel, 2012, “Consolidation and Systemic Risk in the
International
Insurance
Industry,”
working
paper,
Dortmund
University,
Dortmund,Germany.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2135041
Abstract:
This paper is the first to examine the effects of consolidation in the international insurance
industry on the acquirers' contribution to systemic risk. We analyze a sample of
409 international domestic and cross-border mergers which took place between 1984 and 2010
and find mixed empirical evidence in support of a destabilizing effect of consolidation in the
insurance industry. While our results indicate a strong positive relation between consolidation in
the insurance industry and moderate systemic risk in the insurance and banking sector, this effect
does not carry over to extreme systemic risk. Furthermore, we find strong empirical
evidence in support of hypotheses that firm size, leverage and diversification
across insurance lines all add to the destabilizing effect of insurance consolidation. At the same
time, cross-border mergers are revealed to have a limiting influence on the merger-related
changes in moderate systemic risk.
Weiss, Gregor N.F., Denefa Bostandzic, and Felix Irresberger, 2013, “Catastrophe Bonds
and Systemic Risk,” working paper, Dortmund University, Dortmund, Germany.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2313160
Abstract:
Do catastrophe bonds increase or decrease the exposure and contribution to systemic risk of the
issuing insurance companies? And if such issues influence systemic stability, what design
features of the bond and characteristics of the issuing insurer cause catastrophe bond issues to
destabilize the financial sector? Contrary to current conjectures of insurance regulators, we find
that the contribution of ceding insurers to systemic risk actually decreases significantly after the
issue of a catastrophe bond. We empirically confirm that a higher pre-issue leverage, a higher
firm valuation and previous cat bond issues all exert a decreasing effect on the issuer's systemic
risk contribution.
Weiss, Gregor N.F. and Janina Muhlnickel, 2014, “Why Do Some Insurers Become
Systemically Relevant,” forthcoming, Journal of Financial Stability.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2214005
Abstract:
49
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 nonpolicyholder 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.
World Economic Forum, 2008, Global Risks 2008 (Geneva, Switzerland).
http://www.weforum.org/pdf/globalrisk/report2008.pdf
Abstract:
This report examines global risks for 2008 from a range of perspectives. It focuses on four
emerging issues that shape the global risk landscape, namely systemic financial risk, food
security, supply chains and the role of energy. The paper then presents a collective assessment
of global risks in 2008, looks at the methodological hurdles around the representation of
interconnectedness and demonstrates how risk "squeezing" and homogenization of risk have
changed the way risk is perceived globally. It also examines the role of financial markets as tools
of risk transfer and risk mitigation. Finally, it analyzes the construction of risk mitigation
coalitions and country risk management.
Xiao, Yingbin, 2011, “Financial and Risk Analysis of Swiss Banks and Insurance
Companies,” working paper, International Monetary Fund, Washington, DC.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1931826
Abstract:
Switzerland has a systemically important financial sector. This paper analyzes
the financial soundness and riskdynamics of Swiss banks and insurance companies for the past
five years. The cross-country comparisons show that despite the recovery in profitability and
capital for banks and insurance companies, challenges and risks remain. In particular,
big banks should continue to deleverage, enhance capital quality, and build stronger liquidity
buffers. Adopting the “Too Big To Fail” legislation is crucial to reduce the systemic risk. Preemptive measures are needed to address weaknesses in mortgage lending standards and
associated risk management practices. The full implementation of the Swiss Solvency Test is an
important step forward to enhance the insurance sector’s resilience while a sustained low interest
rate has negatively affected the sector. Risks associated with insurance companies’ exposure to
the real estate market warrant continued close monitoring and effective management.
Zhou, Ruilin, 2000, “Understanding Intraday Credit in Large-Value Payment Systems,”
Federal Reserve Bank of Chicago Economic Perspectives 24 (3): 29-44.
http://www.chicagofed.org/digital_assets/publications/economic_perspectives/2000/3qep3.pdf
Abstract:
A large-value (or wholesale) payment system is a contractual and operational arrangement that
banks and other financial institutions use to transfer large-value, time-critical funds to each other.
The key issues in large-value payment systems and the optimal payment system design that
50
addresses these issues are examined. The remedy for liquidity shortage in a real-time gross
settlement system, the provision of intraday liquidity by the central bank and the policies
designed to reduce the central bank's resulting exposure to credit risk are discussed.
Three intraday-credit policies commonly used by central banks are described: 1. a cap on an
institution's net debit position during the day, 2. an interest charge on the usage on intraday credit,
and 3. a collateral requirement to back the extension of intraday credit. The experience of
Fedwire after the introduction of the first two policies is discussed.
Zolnor, Matthew A., 2009, “Regulating Credit Default Swaps as Insurance: A Law and
Economics Perspective,” The Journal of Investment Compliance 10: 54-64.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1409112
Abstract:
Purpose - The purpose of this paper is to analyze a recent proposal by the State of New York that
would subject a large portion of the credit default swap (CDS) market to statebased insurance regulatory oversight. Design/methodology/approach - Using the collapse of
AIG as an example of the systemic risk inherent in unregulated CDS transacting, the Coase
Theorem is then applied to determine the optimal level of CDS regulatory oversight. Findings Although CDSs resemble insurance contracts in many respects, they are also uniquely complex
financial instruments that are continually changing and thus not well suited for the antiquated
state-based model of insurance regulation. Furthermore, the external forces that influence statebased regulatory decision-making are likely to produce inefficient regulation. Practical
implications - The Coase Theorem states that the optimal level of regulatory oversight is the one
that causes market participants to internalize the risk inherent in transacting and does so at the
lowest cost. Because of the complexity of CDS contracts and the unique forces that guide statebased regulatory decision-making, the State of New York's proposal is ill advised.
Originality/value - By utilizing a law and economics perspective, it becomes clear that
although a state-based model of regulatory oversight may force market participants to internalize
systemic risk, it is nevertheless suboptimal because it does not do so at the lowest cost.
51