Does the Insurance Sector Create Systemic Risk?

Abstract

The current financial crisis is a classic example of systemic risk. The aim of this paper is to determine whether insurance companies pose a systemic risk in an economy. To answer this question the essence of systemic risk in the insurance industry as well as the main criteria for its measurement have been defined. The primary conclusion is that the core activities of insurers do not pose a systemic risk. Assessing the insurance industry as a potential creator of systemic risk, it was concluded that insurers are neither "too big" nor "too interconnected" to fail. However, the engagement of insurers in non-core financial activities, such as acquiring credit risk or trading in derivatives, may carry a systemic threat to financial stability. To reduce systemic risk from non-core activities, regulators need to develop better mechanisms for insurance group supervision.