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Designing a Counter-Cyclical Insurance Program for Systemic Risk

The Journal of Risk and Insurance, Forthcoming

Posted: 1 Feb 2012 Last revised: 24 Apr 2012

Joseph H.T. Kim

University of Waterloo - Department of Statistics and Actuarial Science

Phelim P. Boyle

Wilfrid Laurier University - School of Business & Economics; University of Waterloo

Date Written: October 25, 2011

Abstract

This paper 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 CoCTE, a conditional risk measure, adapted from conditional VaR. Current regulations have been criticized on the grounds that their capital requirements are pro-cyclical. They require extra capital in periods of extreme stress thus exacerbating a crisis. We show how to construct a counter-cyclical risk charge and illustrate the approach using a numerical example.

Keywords: Systemic risk, pro-cyclical risk charge, risk capital, CoVaR, CoCTE, regime switching

Suggested Citation

Kim, Joseph H.T. and Boyle, Phelim P., Designing a Counter-Cyclical Insurance Program for Systemic Risk (October 25, 2011). The Journal of Risk and Insurance, Forthcoming . Available at SSRN: https://ssrn.com/abstract=1666553

Joseph H.T. Kim (Contact Author)

University of Waterloo - Department of Statistics and Actuarial Science ( email )

Waterloo, Ontario N2L 3G1
Canada

Phelim P. Boyle

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada
519 884 1970 (Phone)
519 888 1015 (Fax)

University of Waterloo

Waterloo, Ontario N2L 3G1
Canada

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