Designing a Countercyclical Insurance Program for Systemic Risk

31 Pages Posted: 22 Nov 2012  

Phelim P. Boyle

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

Joseph H.T. Kim

University of Waterloo - Department of Statistics and Actuarial Science

Date Written: December 2012

Abstract

This article 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 co‐conditional tail expectation, a conditional risk measure adapted from conditional value‐at‐risk. Current regulations have been criticized on the grounds that their capital requirements are procyclical. They require extra capital in periods of extreme stress thus exacerbating a crisis. We show how to construct a countercyclical risk charge and illustrate the approach using a numerical example.

Suggested Citation

Boyle, Phelim P. and Kim, Joseph H.T., Designing a Countercyclical Insurance Program for Systemic Risk (December 2012). Journal of Risk and Insurance, Vol. 79, Issue 4, pp. 963-993, 2012. Available at SSRN: https://ssrn.com/abstract=2179384 or http://dx.doi.org/10.1111/j.1539-6975.2012.01473.x

Phelim P. Boyle (Contact Author)

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

Joseph H.T. Kim

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

Waterloo, Ontario N2L 3G1
Canada

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