What's the Value of a TBTF Guaranty? Evidence from the G-SII Designation for Insurance Companies

Abstract

We document median abnormal stock returns of 12% (U.S. $17.2 billion) for international insurance firms designated as Global Systemically Important Insurers (G-SII). These gains are associated with a fall in default probabilities, an increase in expected asset risk and an insignificant loss to creditors. Abnormal price responses for the G-SII show significant cross correlations with measures of firm risk and with country-level measures of regulatory quality. Over the same event window, identical measures for other large insurance firms show no significant average change. These results suggest that TBTF policies improve financial stability by lowering risk for the largest and riskiest firms, but the protection still comes at some cost, despite an emphasis in current policies on curtailing the moral hazard effects of protection.

Keywords: Insurance, Too big to fail (TBTF), Systemically important financial institutions (SIFI)

JEL Classification: G22, G23, G28