An Analysis of Systemic Risk in the Insurance Sector – Evidence from Asia-Pacific Region
-
Masayasu Kanno
Abstract
This study contributes to the assessment of systemic risk for the insurance sector. We conducted two types of model approaches and scrutinized each insurer’s marginal systemic risk contribution to the entire Asia-Pacific insurance sector during the global financial crisis and thereafter. We applied the hypothetical distress insurance premium as a systemic risk measure by considering the “policyholder protection scheme” of each country and then incorporating the dynamic conditional correlation as the time-dependent, heterogeneous correlation parameter in the premium. Ping An Insurance (Group) Co. of China was only group in the Asia-Pacific region to be selected as a Globally Systemically Important Insurer (G-SII) in July 2013. Ping An Insurance was ranked first based on the marginal contribution of each insurer during the global financial crisis, and thereafter it was also ranked first based on recent data; therefore, we validated the G-SII’s selection. We propose these model approaches to be used in a mutually complementary manner as selection approaches for G-SIIs and risk management tools for insurers.
Acknowledgments
The author received a research grant from Ishii Memorial Securities Research Promotion Foundation, Japan. He sincerely appreciates this assistance.
References
Acharya, V. V., L. H.Pedersen, T.Philippon, and M. P.Richardson. 2010. “Measuring Systemic Risk.” New York University Stern Schook of Business, AFA 2011 Denver Meetings Paper.10.26509/frbc-wp-201002Suche in Google Scholar
Adrian, T., and M.Brunnermeier. 2011. “CoVaR.” NBER, Working Paper No. 17454.Suche in Google Scholar
Allen, W., and G.Wood. 2006. “Defining and Achieving Financial Stability.” Journal of Financial Stability2(2):152–72.10.1016/j.jfs.2005.10.001Suche in Google Scholar
Bartram, S., G.Brown, and J.Hund. 2007. “Estimating Systemic Risk in the International Financial System.” Journal of Financial Economics86(3):835–69.10.1016/j.jfineco.2006.10.001Suche in Google Scholar
Cocco, J., F.Gomes, and N.Martins. 2009. “Lending Relationships in the Interbank Market.” Journal of Financial Intermediation18(1):24–48.10.1016/j.jfi.2008.06.003Suche in Google Scholar
Davis, E., and D.Karim. 2008. “Comparing Early Warning Systems for Banking Crises.” Journal of Financial Stability4(2):89–120.10.1016/j.jfs.2007.12.004Suche in Google Scholar
Duan, J.-C., J.Sun, and T.Wang. 2012. “Multiperiod Corporate Default Prediction – A Forward Intensity Approach.” Journal of Econometrics1:191–209.10.1016/j.jeconom.2012.05.002Suche in Google Scholar
Engle, R. 2002. “Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models.” Journal of Business and Economic Statistics20(3):339–50.10.1198/073500102288618487Suche in Google Scholar
Engle, R., and M.Armellino. 2011. “An early warning on systemic risk.”http://www.stern.nyu.edu/experience-stern/faculty-research/UAT024194Suche in Google Scholar
Fender, I., and P.McGuire. 2010. “Bank Structure, Funding Risk and the Transmission of Shocks Across Countries: Concepts and Measurement.”BIS Quarterly Review September 2010:63–79.Suche in Google Scholar
Geneva Association Systemic Risk Working Group.2010. “Systemic Risk in Insurance-an Analysis of Insurance and Financial Stability.” Special Report, The Geneva Association.Suche in Google Scholar
Giesecke, K., and B.Kim. 2011. “Systemic Risk: What Defaults Are Telling us.” Journal of Management Science57(8):1387–405.10.1287/mnsc.1110.1375Suche in Google Scholar
Gupton, G. M., C. C.Finger, and M.Bhatia. 1997. CreditMetrics – Technical Document. New York: J.P. Morgan & Co. Inc.Suche in Google Scholar
Haldane, A. 2009. Rethinking the Financial Network. Amsterdam: Speech at the Financial Student Association.Suche in Google Scholar
Huang, X., H.Zhou, and H.Zhu. 2009. “A Framework for Assessing the Systemic Risk of Major Financial Institutions.” Journal of Banking and Finance33:2036–49.10.1016/j.jbankfin.2009.05.017Suche in Google Scholar
Huang, X., H.Zhou, and H.Zhu. 2012a. “Assessing the Systemic Risk of a Heterogeneous Portfolio of Banks during the Recent Financial Crisis.” Journal of Financial Stability8:193–205.10.1016/j.jfs.2011.10.004Suche in Google Scholar
Huang, X., H.Zhou, and H.Zhu. 2012b. “Systemic Risk Contributions.” Journal of Financial Services Research42:55–83.10.1007/s10693-011-0117-8Suche in Google Scholar
IAIS.2011. “Insurance and Financial Stability.”Suche in Google Scholar
IAIS.2012. “Global Systemically Important Insurers: Proposed Policy Measures.”Suche in Google Scholar
IAIS.2013a. “Global Systemically Important Insurers (G-SIIs) and the Policy Measures That Will Apply to Them.”Suche in Google Scholar
IAIS.2013b. “Global Systemically Important Insurers: Initial Assessment Methodology.”Suche in Google Scholar
IAIS.2013c. “Global Systemically Important Insurers: Policy Measures.”Suche in Google Scholar
IMF, BIS and FSB. 2009. “Guidance to Assess the Systemic Importance of Financial Institutions, Markets and Instruments: Initial Considerations.” Report to the G-20 Finance Ministers and Central Bank Governors.Suche in Google Scholar
Kanno, M. 2010. Financial Risk Capital and Integrated Risk Management (in japanese). Tokyo: Kinzai Institute for Financial Affairs.Suche in Google Scholar
Lehar, A. 2005. “Measuring Systemic Risk: A Risk Management Approach.” Journal of Banking and Finance29(10):2577–603.10.1016/j.jbankfin.2004.09.007Suche in Google Scholar
Merton, R. C. 1974. “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates.” Journal of Finance29(2):449–70.Suche in Google Scholar
OECD. 2013. “Policyholder Protection Schemes: Selected Considerations.” OECD Publishing, OECD Working Papers on Finance, Insurance and Private Pensions, No. 31.Suche in Google Scholar
Oliver, C. 2011. “NUS-RMI Credit Research Initiative Technical Report Version: 2012 update 2.” Global Credit Review2(1):65–90.Suche in Google Scholar
Schuermann, T. 2004. “What Do We Know About Loss Given Default?” Wharton Financial Institutions Center, working paper.10.2139/ssrn.525702Suche in Google Scholar
Sinnott, P. 2010. “Life Insurance Market in Asia Excluding Japan.” In Paper presented at The Institute of Actuaries of Japan.Suche in Google Scholar
SwissRe. 2012. “World Insurance in 2011.” Sigma3:1–44.Suche in Google Scholar
- 1
In China, the direct loan transactions between private companies are prohibited by the law.
- 2
The number shown in parentheses indicates the weight.
- 3
The Credit Research Initiative (CRI) is a non-profit undertaking by the Risk Management Institute at National University of Singapore (NUS), which seeks to promote research and development in the critical area of credit risk. The foundation of the CRI is the probability of default (PD) model, which has been developed using a database of about 60,400 listed firms in the Asia-Pacific, North America, Europe, Latin America, the Middle East, and Africa. They present PDs from this model at the web portal http://www.rmicri.org/. Refer to Duan et al. (2012) and Oliver (2011) for the model’s details.
- 4
This is a kind of risk contribution. For details, refer to Kanno (2010, 174–76).
- 5
For reference, Huang, Zhou, and Zhu (2012a) treated systemic risk of the banking sector in the Asia-Pacific region excluding Japan and set the threshold at 10%. In contrast, in consideration of a feature that insurance liabilities are provisions against future insurance accidents or benefits, we set the threshold at 5% conservatively.
- 6
Note that we calculated not the correlation matrix for the DCCs but the pairwise correlations from DCC time series owing to the technical specification of the software we used.
- 7
This index, calculated and published by a Japanese newspaper company, Nikkei Inc., is the predictive volatility of the Nikkei Average Stock Price for one month forward and is similar to the VIX published by CBOE which is regarded as the “market gauge of fear” by practitioners. In the existing research of systemic risk, Huang, Zhou, and Zhu (2009) used the VIX as one candidate for the determinants of PDs connected with individual banks.
- 8
They are Tokio Marine Holdings, MS&AD Insurance Group Holdings, and Sompo Japan Insurance.
©2014 by Walter de Gruyter Berlin / Boston
Artikel in diesem Heft
- Frontmatter
- An Analysis of Systemic Risk in the Insurance Sector – Evidence from Asia-Pacific Region
- Demand for Life Insurance in Malaysia: An Ethnic Comparison Using Household Expenditure Survey Data
- The Determinants of Corporate Image for Life Insurers in Taiwan
- Farmland-based Reverse Mortgages for Aged Farmers
- The Longevity Prospects of Australian Seniors: An Evaluation of Forecast Method and Outcome
- Optimal Symmetric No-Trade Ranges in Asset Rebalancing Strategy with Transaction Costs
Artikel in diesem Heft
- Frontmatter
- An Analysis of Systemic Risk in the Insurance Sector – Evidence from Asia-Pacific Region
- Demand for Life Insurance in Malaysia: An Ethnic Comparison Using Household Expenditure Survey Data
- The Determinants of Corporate Image for Life Insurers in Taiwan
- Farmland-based Reverse Mortgages for Aged Farmers
- The Longevity Prospects of Australian Seniors: An Evaluation of Forecast Method and Outcome
- Optimal Symmetric No-Trade Ranges in Asset Rebalancing Strategy with Transaction Costs
