The Invisible Service: The Economics, Regulation, and Systemic Risk of Insurance Markets

By Ralph Koijen, Christian Thimann and Felix Hufeld

Ralph S.J. Koijen

While liquidity risk is inherent in banking, it is not in insurance.

The insurance sector in the Eurozone manages €7.3 trillion in assets, employs about one million people directly, plus many outsourced employees and independent intermediaries, and it has virtually every household and firm as a client (ECB 2016). By managing risks across clients and investors, insurance companies enable individual and collective social, economic, and financial activities. In addition, given the long-term nature of insurance, insurance companies are important long-term investors in global financial markets.

Discussions about systemic risk gained attention following the failure of AIG in 2008 (McDonald and Paulson 2015), and the stress in the sector during the financial crisis more broadly (Koijen and Yogo 2015), as well as the subsequent low interest rate environment. In response to these events, nine large global companies have been qualified as ‘systemically important’ by the Financial Stability Board and are facing new supervisory and prudential measures and standards, in addition to their long-standing national prudential regulatory frameworks. While these new regulatory frameworks and qualifications are all nascent, many conceptual and empirical questions remain unanswered regarding the nature and intensity of systemic risk in the insurance sector.

With a recently published book (Hufeld et al. 2016), we aim to contribute to this debate. Here, we summarise key findings and highlight questions going forward for academics, policymakers, and the insurance sector.

Read the full article as published by VoxEU.org

Ralph S.J. Koijen is Professor of Finance.