Global loss diversification in the insurance sector
AbstractWe study the possibility for international diversification of catastrophe risk by the insurance sector. Adopting the argument that large insurance losses may be a [`]globalizing factor' for the industry, we study the dependence of geographically distant insurance markets via equity returns. In particular, we employ conditional copula theory to model the bivariate dependence of the insurance industry. In contrast to earlier literature on this subject, we disentangle the causes of dependence stemming from the asset side from those from the liability side by conditioning on general market conditions. We find that for both Europe-America and Europe-Asia the dependence is significant. Moreover, we find asymmetric effects: the international dependence is particularly high for losses, even after conditioning for the asset side dependence. Finally, we investigate the time variation in copula parameters and find evidence that dependence in the insurance sector has increased over time, thus reducing the scope for international diversification of large losses in this sector.
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Bibliographic InfoArticle provided by Elsevier in its journal Insurance: Mathematics and Economics.
Volume (Year): 44 (2009)
Issue (Month): 3 (June)
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Web page: http://www.elsevier.com/locate/inca/505554
Catastrophic insurance losses Copula Dependence Diversification;
Other versions of this item:
- Oleg Sheremet & Andr� Lucas, 2008. "Global Loss Diversification in the Insurance Sector," Tinbergen Institute Discussion Papers 08-086/2, Tinbergen Institute.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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