GLOBAL INSURANCE SPILLOVERSBENJAMIN HUSTON

OUTLINE

Evolution of spillovers over time

Change in pre- and post-GFC spillovers

Insurer-to-insurer and insurer-noninsurer spillovers

Spillover clustering, by region and by sector

Systemic importance of spillovers, from a network perspective

MINUTIA

DATA

Week-over-week returns for fifteen large sector- and region-specific equity indices

Coverage spans the period of 2001-2015

METHODOLOGY

Spillovers: generalized forecast error variance decomposition (Diebold and Yilmaz, 2014; Pesaran, 1998)

Networks: eigenvector centrality (see Diestel, 2005)

ROBUSTNESS

Performed same exercise using equity returns and changes in equity return log volatilities, both weighted and unweighted by market cap. Results were virtually identical.

Results were also highly invariant to selection of VAR lag order, the choice of control variables, and to the selection of a forecast error variance decomposition method.

KEY FINDINGS

• Total spillover levels are on the rise and approaching levels observed prior to the 2008 global financial crisis.

• The largest share of spillovers is attributable to North America. The share attributable to Asia is rising the most rapidly.

• On a net basis, the largest spillover asymmetries occur between Europe and North America and between Asia and Europe.

• Across sectors, the largest spillovers occur primarily between banks, life, and PC insurers.

• The sectors which have witnessed the greatest increases in spillovers since the GFC are North American asset managers and reinsurers, Asian life insurers, and European PC insurers.

• Insurer-and-noninsurer (“cross-sector”) spillovers, are approximately twice the size of insurer-insurer (“intra-sector”) spillovers, both within and across regions. Roughly 15 percent of all insurance-related spillovers occur between different geographic regions.

• Relative to the pre-crisis period of 2001-08, the systemic importance of North America and Asia has grown, while that of Europe has somewhat diminished. North America remains the most systemically important region.

• North American asset managers and reinsurers have seen a marked increase in the systemic role they play in the global financial system, as have Asian life insurers and banks.

AM BANKS LIFE PC RE

2004 2008 2012 2016 2004 2008 2012 2016 2004 2008 2012 2016 2004 2008 2012 2016 2004 2008 2012 2016

0

25

50

75

100

2002 2004 2006 2008 2010 2012 2014 2016

p

EVOLUTION OF SPILLOVERS

Left: spillover time series calculated using a 1-year rolling window with overlapping monthly increments. Dashed black lines denote approximate peak dates of the global financial crisis and the European sovereign debt crisis, from left to right respectively. AM = asset managers, BANKS = banks, LIFE = life insurers, PC = property-casualty insurers, RE = reinsurers.

• Total spillover levels amongst asset managers, banks, life insurers, property-casualty (PC) insurers, and reinsurers are on the rise and approaching the levels observed prior to the 2008 global financial and 2012 European sovereign debt crises.

• Across regions, the largest share of spillovers are attributable first to North America and then to Europe. Historically, Asia has contributed the least to spillovers, but its share is rising the most rapidly.

• Across sectors, banks are the greatest originators of spillovers, followed by life and property-causality insurers. Spillovers from asset managers are on par with those from PC insurers and at a near historic-high. Reinsurer spillovers are the lowest in magnitude.

ASIA EUROPE NORTH AMERICA

0

10

20

30

2004 2008 2012 2016 2004 2008 2012 2016 2004 2008 2012 2016

p

Spillovers, by sector

Total spillovers

Spillovers, by region

Spill

over

inde

xSp

illov

er in

dex

CHANGE IN PRE- AND POST-GFC SPILLOVERS

Note: fanplot showing changes in region/sector spillover index levels between the periods 2001-08 and 2010-15. Plot segment length corresponds to region/sector spillover index values. Green and red denote increases and decreases, respectively, in spillover index values between the pre- and post-GFC periods. Segment width does have a semantic role and is merely used to emphasize differences. GFC = “Global Financial Crisis”.

AsiaAM

AsiaBanks

AsiaLife

AsiaPC

AsiaRE

EuropeAM

EuropeBanks

EuropeLife

EuropePC

EuropeRE

NorthAmAM

NorthAmBanks

NorthAmLife

NorthAmPC

NorthAmRE

Relative to the pre-crisis period of 2001-08:

• In North America, spillovers from banks, asset managers and reinsurers, have increased in magnitude while those from life and PC insurers have fallen slightly.

• In Europe, asset manager, life/PC insurer, and reinsure spillovers have increased in magnitude whereas bank spillovers have marginally declined.

• In Asia, bank, life insurer, and reinsurer spillovers have risen as those from asset managers and banks have deceased.

Globally, the sectors which have witnessed the greatest rise in spillovers in the current period are North American asset managers and reinsurers, Asian life insurers, and European PC insurers. Spillovers from North American PC insurers have experienced the largest decline.

INSURANCE SPILLOVERS, 2010-PRESENT

• Insurer-and-noninsurer “cross-sector” spillovers (red), are approximately twice the size of insurer-insurer “intra-sector” spillovers (yellow), both within and across regions.

• Roughly 15 percent of all insurance-related spillovers occur between different geographic regions.

• Within a given region, roughly two-thirds of all spillovers occur between an insurer and a non-insurer (red).

• In absolute terms, North America and Europe exhibit the greatest levels of cross-sector spillovers. In relative terms, Asia experiences the greatest share of such spillovers.

Note: red = spillovers between insurers and non-insurers, yellow = spillovers amongst insurers. Black arrows indicate spillover direction and point from spillover originator to spillover recipient. The numeric values which border each plot section display regional spillover index values.

Cross-sector and intra-sector spillovers

CROSS-REGIONAL SPILLOVERS, 2010-PRESENTOutward spillovers, clustered by region

The greatest magnitude spillovers occur primarily between sectors belonging to the same region. Across regions, large spillovers are observed between Asian banks/life insurers and virtually all North American sectors.

Left: colors denote low (white), medium (yellow), and high (red) levels of spillovers across region/sectors. Right: colors denote net positive (green) and net negative (red) bilaterial spillovers. Spillover directionality is read from matrix column to matrix row. AM = asset managers, BANKS = banks, LIFE = life insurers, PC = property-casualty insurers, RE = re-insurers.

On a net basis, the largest spillover asymmetries occur between Europe and North America and between Asia and Europe. North America is a net recipient of spillovers from Europe, and Europe is in turn a net recipient of Asian spillovers.

NorthAmerica

Europe Asia

NorthAmerica

Europe

Asia

Net spillovers, clustered by regionNorth

AmericaEurope Asia

NorthAmerica

Europe

Asia

CROSS-SECTOR SPILLOVERS, 2010-PRESENTOutward spillovers, clustered by sector

Left: colors denote low (white), medium (yellow), and high (red) levels of aggregate spillovers across sectors. Right: colors denote net positive (green) and net negative (red) bilaterial aggregate spillovers. Spillover directionality is read from matrix column to matrix row. AM = asset managers, BANKS = banks, LIFE = life insurers, PC = property-casualty insurers, RE = re-insurers. See supplementary charts in the Annex for analogous graphs showing region/sector detail.

Net spillovers, clustered by sector

Across sectors, the largest spillovers occur primarily between banks, life insurers, and PC insurers. Spillover from asset managers to banks and life insurers are also quite large.

On net basis, banks and life insurers are vulnerable to virtually every other sector. Life and PC insurers have the largest bilaterial impact on banks and PC insurers have the largest such impact on life insurers.

CHANGE IN PRE- AND POST-GFC SYSTEMIC IMPORTANCE

Eigenvector Centrality

Note: The figure displays a centrality plot of insurance spillovers. Node positions are determined using eigenvector centrality scores and a node’s proximity to the center of the network signifies its importance (i.e., closer nodes are more important). Colored nodes and empty nodes denote post-GFC and pre-GFC centrality scores, respectively. Arrows display the change in systemic risk posed by a given sector between the two periods. The symbols , , correspond to high, medium, and low levels of systemic risk, respectively, and ring colors are used for solely for visual emphasize. See Diestel (2005) for background information on the graph-theoretic concept of centrality. A = asset managers, B = banks, L = life insurers, P = property-casualty insurers, R = re-insurers.

Relative to the pre-crisis period of 2001-08 (gray arrows), the systemic importance of North America and Asia has grown, while that of Europe has somewhat diminished.

• In North America, asset managers and reinsurers, and to a lesser extent banks, have seen a marked increase in the systemic role they play in the global financial system.

• In Asia, life insurers and banks have also begun to play a much larger systemic role, as have PC insurers.

• In Europe, asset managers and PC insurers remain as important as they have in the past, however the centrality of European banks, life insurers, and reinsurers have mitigated since the pre-GFC period.

North America remains the most systemically important region, followed by Europe and then by Asia.

= Asset managers

= Banks

= Life insurers

= PC insurers

= Re-insurers

= North America

= Europe

= Asia

SUMMARY

• Total spillover levels amongst asset managers, banks, life insurers, property-casuality (PC) insurers, and reinsurers are on the rise and approaching historic highs.

• Across regions, the largest share of spillovers are attributable first to North America and then to Europe. Historically, Asia has contributed the least to spillovers, but its share is rising the most rapidly. On a net basis, the largest spillover asymmetries occur between Europe and North America and between Asia and Europe. North America is a net recipient of spillovers from Europe, and Europe is in turn a net recipient of Asian spillovers.

• Across sectors, the largest spillovers occur primarily between banks and life and PC insurers. Spillovers from asset managers to banks and life insurers are also quite large.

• Globally, the sectors which have witnessed the greatest increase in spillovers since the GFC are North American asset managers and reinsurers, Asian life insurers, and European PC insurers. Spillovers from North American PC insurers have moderated the most.

• Insurer-and-noninsurer (“cross-sector”) spillovers, are approximately twice the size of insurer-to-insurer spillovers, both within and across regions. Roughly 15 percent of all insurance-related spillovers occur between different geographic regions.

• Relative to the pre-crisis period of 2001-08, the systemic importance of North America and Asia has grown, while that of Europe has somewhat diminished. North America remains the most systemically important region.

• In North America, asset managers and reinsurers have seen a marked increase in the systemic role they play in the global financial system. In Asia, life insurers and banks too have witnessed a large uptick in the systemic importance of their operations.

REFERENCES

Diebold, Francis X., and KamilYılmaz, 2014, "On the network topology of variance decompositions: Measuring the connectedness of financial firms." Journal of Econometrics 182, no. 1: 119-134.

Diestel, Reinhard, 2005, Graph Theory (3rd ed.), Berlin, New York: Springer-Verlag, ISBN 978-3-540-26183-4.

Pesaran, H. Hashem, and Yongcheol Shin, 1998, "Generalized impulse response analysis in linear multivariate models." Economics Letters 58, no. 1 (1998): 17-29.

ANNEX

SPILLOVER METHODOLOGY

Spillover values are determined using an order independent generalized FEVD (Diebold and Yilmaz, 2014; Pesaran, 1998).

Region/sector equity indices used as endogenous variables in the following VAR model specification:

A spillover from j to i is defined as the portion of i’s total forecast error variance that is attributable to a shock from j:

matrix iondecomposit anceerror variforecast ahead-step H theis ][

],[X][Y

)()(

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t

Hij

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ijijij dds

NETWORK METHODOLOGY

Let be a network with associated sets of vertices and edges and . The eigenvector centrality score, , of a given vertex ∊ is defined as

1,

∊

where

is a vertex which shares an edge with , , is the entry in , the adjacency matrix of , which corresponds to the vertices and , and the eigenvalue is a constant which is satisfies the relationship . The value of

is not necessarily unique and is numerically estimated using the Power Iteration algorithm.

Higher eigenvector centrality scores signify greater network importance. When is a financial network, eigenvector centrality is interpreted as a proxy for systemic risk.

SUPPLEMENTARY CHARTS

Detailed net spillovers, clustered by sector

Detailed outward spillovers, clustered by sector