Reinsurance strategy and network contagion: a macroprudential perspective

Abstract

ABSTRACT This article develops a network-based contagion model to investigate reinsurance strategy from a macroprudential perspective. We analyse the impact of reinsurance strategy on the spillovers from insurance sector to other economic sectors when a catastrophe such as a series of coronavirus-related claims occurs. The risk diversification level of the reinsurance strategy shows nonmonotonic effects on risk spillovers. When the diversified level is high enough relative to the actual magnitude of catastrophe, the spillover effect will not occur. However, when not sufficiently diversified, spillover effect is unavoidable and the diversified level shows a U-shaped relation with economic losses caused by risk spillovers. Our results thus reveal a new reinsurance insight for policymakers and regulators to develop macroprudential policy for managing systemic risk.