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An Empirical assessment of reinsurance risk

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  • Iman van Lelyveld
  • Franka Liedorp
  • Manuel Kampman

Abstract

We analyse the effect of failing reinsurance cover on the stability of Dutch insurers. As insurers often reinsure themselves with other (re)insurers, losses could spread contagiously through the sector. Using a unique and confidential data set on reinsurance exposures, we perform a scenario analysis to measure contagion risks. Based on current exposures, we find no evidence of systemic risk in the Netherlands, even if multiple reinsurance companies fail simultaneously. Next, we analyse to what extent the financial position of individual primary insurers is affected following a particular shock, considering solvency, capital and profit levels. The life insurance industry is hardly affected by reinsurance failures. The non-life industry, however, is vulnerable to a crisis in the European reinsurance market. We also find that members of smaller insurance groups are particularly exposed.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 201.

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Date of creation: Feb 2009
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Handle: RePEc:dnb:dnbwpp:201

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Keywords: reinsurance; contagion; simulation.;

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  1. Guillaume Plantin, . "Does Reinsurance Need Reinsurers?," GSIA Working Papers 2005-E1, Carnegie Mellon University, Tepper School of Business.
  2. Christian Upper, 2007. "Using counterfactual simulations to assess the danger of contagion in interbank markets," BIS Working Papers 234, Bank for International Settlements.
  3. van Lelyveld, Iman & Liedorp, Franka & Pröpper, Marc, 2008. "Stress Testing Linkages between Banks in the Netherlands," MPRA Paper 10092, University Library of Munich, Germany.
  4. de Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic Risk: A Survey," CEPR Discussion Papers 2634, C.E.P.R. Discussion Papers.
  5. Fenn, George W. & Cole, Rebel A., 1994. "Announcements of asset-quality problems and contagion effects in the life insurance industry," Journal of Financial Economics, Elsevier, vol. 35(2), pages 181-198, April.
  6. Upper, Christian & Worms, Andreas, 2002. "Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?," Discussion Paper Series 1: Economic Studies 2002,09, Deutsche Bundesbank, Research Centre.
  7. Lelyveld, Iman van & Liedorp, Franka, 2006. "Interbank Contagion in the Dutch Banking Sector: A Sensitivity Analysis," MPRA Paper 806, University Library of Munich, Germany.
  8. Plantin, Guillaume, 2006. "Does Reinsurance Need Reinsurers?," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
  9. Brian J. Hall, 1998. "Regulatory Free Cash Flow and the High Cost of Insurance Company Failures," NBER Working Papers 6837, National Bureau of Economic Research, Inc.
  10. Fields, Joseph A & Klein, Linda S & Myskowski, Edward G, 1998. "Lloyd's Financial Distress and Contagion within the US Property and Liability Insurance Industry," Journal of Risk and Uncertainty, Springer, vol. 16(2), pages 173-85, May-June.
  11. Elsinger, Helmut & Lehar, Alfred & Summer, Martin, 2005. "Using Market Information for Banking System Risk Assessment," MPRA Paper 817, University Library of Munich, Germany.
  12. James, Christopher, 1991. " The Losses Realized in Bank Failures," Journal of Finance, American Finance Association, vol. 46(4), pages 1223-42, September.
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