Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Capital regulation and systemic risk in the insurance sector

Capital regulation and systemic risk in the insurance sector This paper aims to analyze systemic risk in and the effect of capital regulation on the European insurance sector. In particular, the evolution of an exposure measure (SRISK) and a contribution measure (Delta CoVaR) are analyzed from 1985 to 2016.Design/methodology/approachWith the help of multivariate regressions, the main drivers of systemic risk are identified.FindingsThe paper finds an increasing degree of interconnectedness between banks and insurance that correlates with systemic risk exposure. Interconnectedness peaks during periods of crisis but has a long-term influence also during normal times. Moreover, the paper finds that the insurance sector was greatly affected by spillovers from the process of capital regulation in banking. While European insurance companies initially at the start of the Basel process of capital regulation were well capitalized according to the SRISK measure, they started to become capital deficient after the implementation of the model-based approach in banking with increasing speed thereafter.Practical implicationsThese findings are highly relevant for the ongoing global process of capital regulation in the insurance sector and potential reforms of Solvency II. Systemic risk is a leading threat to the stability of the global financial system and keeping it under control is a main challenge for policymakers and supervisors.Originality/valueThis paper provides novel tools for supervisors to monitor risk exposures in the insurance sector while taking into account systemic feedback from the financial system and the banking sector in particular. These tools also allow an evidence-based policy evaluation of regulatory measures such as Solvency II. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economic Policy Emerald Publishing

Capital regulation and systemic risk in the insurance sector

Loading next page...
 
/lp/emerald-publishing/capital-regulation-and-systemic-risk-in-the-insurance-sector-urqJyTQl7i
Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1757-6385
DOI
10.1108/jfep-11-2017-0105
Publisher site
See Article on Publisher Site

Abstract

This paper aims to analyze systemic risk in and the effect of capital regulation on the European insurance sector. In particular, the evolution of an exposure measure (SRISK) and a contribution measure (Delta CoVaR) are analyzed from 1985 to 2016.Design/methodology/approachWith the help of multivariate regressions, the main drivers of systemic risk are identified.FindingsThe paper finds an increasing degree of interconnectedness between banks and insurance that correlates with systemic risk exposure. Interconnectedness peaks during periods of crisis but has a long-term influence also during normal times. Moreover, the paper finds that the insurance sector was greatly affected by spillovers from the process of capital regulation in banking. While European insurance companies initially at the start of the Basel process of capital regulation were well capitalized according to the SRISK measure, they started to become capital deficient after the implementation of the model-based approach in banking with increasing speed thereafter.Practical implicationsThese findings are highly relevant for the ongoing global process of capital regulation in the insurance sector and potential reforms of Solvency II. Systemic risk is a leading threat to the stability of the global financial system and keeping it under control is a main challenge for policymakers and supervisors.Originality/valueThis paper provides novel tools for supervisors to monitor risk exposures in the insurance sector while taking into account systemic feedback from the financial system and the banking sector in particular. These tools also allow an evidence-based policy evaluation of regulatory measures such as Solvency II.

Journal

Journal of Financial Economic PolicyEmerald Publishing

Published: Aug 21, 2018

Keywords: Systemic risk; Banks; Financial risk and risk management; Insurance sector; Economics of regulation; Capital shortfall; Interconnectedness between banks and insurance; B26; E63; F65; G22; G28; H12; N24

References