Premium
Designing a Countercyclical Insurance Program for Systemic Risk
Author(s) -
Boyle Phelim,
Kim Joseph H. T.
Publication year - 2012
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2012.01473.x
Subject(s) - solvency , systemic risk , construct (python library) , actuarial science , capital requirement , economics , capital (architecture) , value at risk , business , financial crisis , monetary economics , risk management , finance , macroeconomics , computer science , microeconomics , history , archaeology , programming language , incentive , market liquidity
This article proposes a framework for measuring and managing systemic risk. Current solvency regulations have been criticized for their focus on individual firms rather than the system as a whole. We show how an insurance program can be designed to deal with systemic risk through a risk charge on participating institutions. The risk charge is based on the generalized co‐conditional tail expectation, a conditional risk measure adapted from conditional value‐at‐risk. Current regulations have been criticized on the grounds that their capital requirements are procyclical. They require extra capital in periods of extreme stress thus exacerbating a crisis. We show how to construct a countercyclical risk charge and illustrate the approach using a numerical example.