|Helmut Gründl, Christian Kubitza, Fabian Regele
Business diversification can potentially lower the distress risk of financial institutions due to coinsurance effects between imperfectly correlated cash flows. If a diversified institution is subject to an economic shock and benefits from coinsurance effects, business diversification might also lower the potential for financial contagion and thereby lower systemic risk from a “domino” perspective, in which the distress of a financial institution causes substantial losses to other institutions in a system. For insurers, the relatively long-term life insurance business and the relatively short-term non-life insurance business typically show different underwriting characteristics that might generate a stabilizing coinsurance effect, which could ultimately lower systemic risk.
Thus, this project studies how insurance business diversification between life and non-life insurance is related to the distress risk of an insurer and if business diversification reduces the insurer’s contribution to systemic risk in terms of financial contagion, i.e. the insurer’s propensity to transmit economic shocks to other institutions.