🤖 AI Summary
This study investigates the dynamic risk spillover mechanisms between the European insurance sector and equity, bond, and banking markets, examining the sector’s active role in systemic risk transmission. Method: Employing an extended time-varying generalized forecast error variance decomposition (GFEVD) framework—novelly integrating multidimensional performance and risk metrics—and complementing it with firm-level panel modeling. Results: The insurance sector exhibits significant net risk exports during the subprime crisis, European sovereign debt crisis, and COVID-19 pandemic. Reinsurers and diversified conglomerates serve as critical transmission nodes; systemically important insurers form a highly interconnected cluster, while subsectors display marked heterogeneity in spillover patterns. The findings challenge the conventional view of insurers as passive risk absorbers, instead establishing their proactive systemic role. This work provides a microfoundation for macroprudential policy and delivers a targeted identification tool for systemic risk monitoring.
📝 Abstract
This paper investigates the dynamic interdependencies between the European insurance sector and key financial markets-equity, bond, and banking-by extending the Generalized Forecast Error Variance Decomposition framework to a broad set of performance and risk indicators. Our empirical analysis, based on a comprehensive dataset spanning January 2000 to October 2024, shows that the insurance market is not a passive receiver of external shocks but an active contributor in the propagation of systemic risk, particularly during periods of financial stress such as the subprime crisis, the European sovereign debt crisis, and the COVID-19 pandemic. Significant heterogeneity is observed across subsectors, with diversified multiline insurers and reinsurance playing key roles in shock transmission. Moreover, our granular company-level analysis reveals clusters of systemically central insurance companies, underscoring the presence of a core group that consistently exhibits high interconnectivity and influence in risk propagation.