Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/148146
Authors: 
Davison, Matt
Leadbetter, Darrell
Lu, Bin
Voll, Jane
Year of Publication: 
2016
Series/Report no.: 
Bank of Canada Staff Working Paper 2016-39
Abstract: 
Interconnectedness among insurers and reinsurers at a global level is not well understood and may pose a significant risk to the sector, with implications for the macroeconomy. Models of the complex interactions among reinsurers and with other participants in the financial system and the real economy are at a very early stage of development. Parts of the market remain opaque to both regulators and market participants, particularly the counterparty arrangements among reinsurers through retrocession agreements. The authors create several plausible networks to model these relationships, each consistent with the financial statement data of the reinsurer. These networks are stress-tested under a series of severe but plausible catastrophic-loss scenarios. This analysis contributes to the literature by (i) applying a network-model approach common in the banking literature to the insurance industry; (ii) assessing the interconnections among reinsurers through potential claims rather than premiums; and (iii) investigating the most opaque part of the global insurance market, namely, counterparty arrangements among global reinsurers (retrocession). The authors find that contagion in the global reinsurance market is plausible and that the size of the potential market disruption is sensitive to (i) the distribution of risk among counterparties, (ii) the trigger for financial distress, (iii) the time horizon for claims resolution and (iv) the degree of loss netting. The findings suggest that further study of industry practices in these four areas would improve our ability to assess risk in the insurance sector and promote financial stability.
Subjects: 
Financial stability
Financial system regulation and policies
Financial institutions
Financial services
JEL: 
G10
G15
G18
G22
G28
C63
Document Type: 
Working Paper

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