The Emergence of Systemically Important Insurers

Abstract

The increasingly intertwined banking and insurance sectors have lead to calls for stronger regulatory oversight of the insurance industry as potentially systemically risky. Ultimately systemic risk impacts the real economy, and this paper measures the risk via interconnectedness of the banking, insurance and real economy firms in the US for 500 firms from 2003-2011. Systemic risk in the banking sector peaked with the top of the housing cycle in 2006, while in the insurance sector it continued to rise until September 2008. The rescue of AIG and announcement of TARP dramatically decreased this interconnectedness risk. The results clearly demonstrate that whilst banking firms are the most consistently systemically risky in the economy, insurance firms are a readilly identifiable group displaying substantial systemic risk via interconnectedneess with the financial sector and the real economy.

Keywords: banking, insurance, systemic risk

JEL Classification: G22, G21, G01, G28