Systemic Risk in the European Insurance Sector

TL;DR

This study analyzes systemic risk connectedness in the European insurance sector across various levels, highlighting insurers' significant role during stress and the channels through which risks propagate.

Contribution

It introduces a comprehensive framework to measure systemic risk in European insurers at multiple levels, revealing heterogeneity and key risk channels.

Findings

Insurers are key contributors to systemic risk during stress episodes.

Risk spillovers are linked to sovereign and funding stress indicators.

Certain insurers form a stable core of systemic importance.

Abstract

This paper studies systemic-risk connectedness in the European insurance sector at three levels of granularity: across major segments of financial markets, across insurance subsectors, and across individual insurance companies. Using a common connectedness framework applied to returns, volatility, value-at-risk, and expected shortfall, we document that insurers are an important component of systemic-risk connectedness, especially during stress episodes. We also provide reduced-form evidence on economically relevant channels in the European institutional setting: aggregate insurer spillovers co-move with term spreads, sovereign spreads, and funding stress, and firm-level insurer-to-bank spillovers vary with sovereign risk and domestic sovereign-bond home bias in a way consistent with a balance-sheet channel. The analysis further reveals substantial heterogeneity across subsectors and identifies a stable core of systemically central insurers in firm-level networks.