The Network Structure and Systemic Risk in the Global Non-Life Insurance Market

Abstract

This paper contributes to the literature on systemic risk by assessing the network structure of bilateral insurance exposures in the global non-life insurance market. The reinsurance is the major risk transfer function in the global insurance market and its network has a hierarchical structure. First, we estimate the bilateral exposures matrix and analyze the interconnectedness in the global reinsurance network using network topologies such as degrees and centrality measures. Subsequently, for the model analysis, we introduce a multi-period framework for simultaneously clearing the insurance obligations of all insurers in the network. Defaults are classified into stand-alone defaults and contagious defaults. To theoretically analyze systemic risk during and after the global financial crisis, we assume a global reinsurance network in which insurers worldwide participate. The top 123 insurers in our sample comprise a major part of the network. The theoretical analysis showed that many stand-alone defaults occurred during and after the global financial crisis. No theoretical contagious default has been triggered by stand-alone defaults. However, the systemic stress test we conducted proved the occurrence of contagious defaults. Systemic risk is relatively small with regard to the interconnectedness in the non-life insurance market.