Insurance Industry:: super-spreaders of systemic risk

Who do you believe…not who do you want to believe? Are they or aren’t they?panic button

I am far from an expert on the subject but, from what I do know, I have a “bad feeling” about aspects of the Geneva Association perspective and UK stance (as opposed to USA) on what constitutes “systemically important”. Rather than repeat myself, I have outlined my thoughts in this article which contains links to other, related, items.

If you are interested in getting deeper into the subject, particularly if you like getting into the maths, you are going to have fun with this paper from Nov. 2011: Econometric Measures of Connectedness and Systemic Risk in the Finance and Insurance Sectors

We propose several econometric measures of connectedness based on principal-components analysis and Granger-causality networks, and apply them to the monthly returns of hedge funds, banks, broker/dealers, and insurance companies. We find that all four sectors have become highly interrelated over the past decade, likely increasing the level of systemic risk in the finance and insurance industries through a complex and time-varying network of relationships. These measures can also identify and quantify financial crisis periods, and seem to contain predictive power in out-of-sample tests. Our results show an asymmetry in the degree of connectedness among the four sectors, with banks playing a much more important role in transmitting shocks than other financial institutions.

The nonlinear Granger-causality results are also consistent with the results of the linear Granger-causality tests in two respects: the connections are increasing over time, and even after controlling for the S&P 500, shocks to one financial institution are likely to spread to all other financial institutions. p. 34

Personally, as I have confessed before, I was never that much into Maths when I was younger so I am content with the message that is conveyed by this infographic from the report:

Systemic risk (econometric measures)

You can make you’re own mind up because, in truth, we [should that be “they”?] are in uncharted territory which, UNLESS I AM VERY MUCH MISTAKEN, MEANS THAT WE AREN’T DEALING WITH RISK (KNOWNS) BUT UNCERTAINTY (UNKNOWNS)…the implications of the difference between the two are considerable.

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