Catastrophic and systemic risk in the non-life insurance sector: A micro-structural contagion approach

Abstract

Borrowing from the interbank contagion literature, we propose a model to study the stability of non-life insurance sector in presence of catastrophic events. These events are increasingly common, and cause a large amount of damage in short periods. To account for this risk we introduce random and correlated reinsurance claims. We show in a simulation study that the sector is particularly sensitive to random correlated insurance claims, and the threat of systemic risk emerges. The risk persists even with highly diversified network structures. The work is relevant for regulators to define macro-prudential policies, and for practitioners to measure credit risk.