The growing interconnections of the insurance industry

The interconnectedness of the insurance sector represents the links with other actors in the financial system and the real economy, which can serve as a channel for the propagation and amplification of shocks. Regulators consider that the interconnectedness of the insurance industry contributed to the spread of the global financial crisis of 2007–2009. Consequently, in the aftermath of the crisis, the authorities decided to strengthen the regulation of the insurance sector by introducing new macroprudential measures based mainly on the interconnection of insurers.

Aware of the need to better monitor the interconnection of the insurance sector, regulators have undertaken work to collect accounting data on the links between firms (G20 Data Gaps Initiative). However, to date, these proprietary databases are mainly available on a short-term basis, at a relatively low frequency, and cover a limited field of institutions and potential links. In this context, this document introduces a new measure of the interconnectedness of insurance companies based on public stock market data, which covers an extended period and reflects information more quickly than accounting data. Unlike other market-based indicators that focus on insurers’ linkages within the financial sector, the proposed measure can capture insurers’ linkages to financial and non-financial corporations. We argue that considering the interconnectedness of the insurance industry with the real economy is key to assessing the likelihood of future insurance industry crises.

The main objective of this paper is to determine whether the level of interconnectedness of the insurance industry has increased over the past decades. A better understanding of the evolution of interconnections can help determine whether the likelihood of a crisis in the insurance industry has increased over time. Even though insurers played a central role during the global financial crisis, their status as systemically important financial institutions remains in question, given that, historically, insurance crises have been rare and had limited consequences. (Baluch et al., 2011). To our knowledge, this paper is the first to test the existence of a long-term increase in the level of interconnectedness of the insurance industry.

The empirical analysis is conducted from 1973 to 2018, for 16 developed countries, both at the sectoral level and at the institutional level. We show that the interconnectedness of the entire insurance industry with financial and non-financial firms has increased significantly over the past decades (see Figure 1). On the other hand, the links of non-financial companies (with the financial sector and the real economy) have not experienced the same phenomenon. Moreover, if the level of interconnection of the insurance sector remains on average lower than that of the banking sector, the largest insurance companies appear to be as interconnected as the largest banks.

These results highlight the increasing level of interconnectedness of the insurance industry, which supports the current development of macroprudential regulation. Specifically, our results suggest that the current move towards regulation that targets the entire industry rather than a small number of large insurers is warranted. Beyond this new framework, our findings call for continued annual identification of systemically important insurers, as the level of interconnectedness of some large insurers is significantly higher than the rest of the industry.

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