Financial Crisis, Systemic Risk, and Performance of Financial Risk Insurers
43 Pages Posted: 24 Aug 2010 Last revised: 11 Mar 2013
Date Written: August 23, 2010
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 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.
Keywords: financial crisis, systemic risk, financial contagion
JEL Classification: G14
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