Systemic Risk in the Insurance Industry and Its Impact on the Economy

Abstract

Systemic risk, defined as the risk that a failure of a large financial institution could lead to counterparty failures and could trigger adverse effects for the real economy, has been a priority for both academicians and policy-makers. The literature focuses on the measures and definition of systemic risk and on its impact on the financial sector with little or no attention given to the relationship between systemic risk and the real economy. In this paper, we investigate the link between the systemic risk in the insurance sector and the macro economy during the 2008 financial crisis. In particular, we test the predictive power of insurance companies’ systemic risk of macroeconomic downturns using various measures of systemic risk constructed from daily returns for 169 insurance companies between 1988 and 2011. Our findings show that insurance systemic risk forecasts macroeconomic downturns three months into the future.