A Dynamic MST- deltaCovar Model Of Systemic Risk In The European Insurance Sector

TL;DR

This paper introduces a dynamic model combining MST and deltaCoVaR to analyze systemic risk in the European insurance sector from 2005 to 2019, focusing on interlinkages and risk build-up.

Contribution

It develops a novel dynamic MST-deltaCoVaR framework to assess systemic risk contributions of major European insurers over time.

Findings

Identifies key insurers contributing to systemic risk based on MST centrality measures.

Shows correlation between deltaCoVaR contributions and network centrality.

Provides insights into systemic risk evolution in the European insurance sector.

Abstract

This work is an answer to the EIOPA 2017 report. It follows from the latter that in order to assess the potential systemic risk we should take into account the build-up of risk and in particular the risk that arises in time, as well as the interlinkages in the financial sector and the whole economy. Our main tools used to analyse the systemic risk dynamics in the European insurance sector during the years 2005-2019 are the topological indices of minimum spanning trees (MST) and the deltaCoVaR measure. We address the following questions: 1) What is the contribution to systemic risk of each of the 28 largest European insurance companies whose list includes also those appearing on the G-SIIs list? 2) Does the analysis of the deltaCoVaR of those 28 insurance companies and the conclusions we draw agree with the our claims from our latest article [Wanat S., Denkowska A. 2019]. In clear: does the most important contribution to systemic risk come from the companies that have the highest betweenness centrality or the highest degree in the MST obtained?