Assessing Spillover Effects from the Perspective of the Insurance Industry

• Applicant: Professorin Dr. Nadine Gatzert
• Subject Area: Accounting and Finance
• Term: from 2017 to 2019
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 323394381

Reputation risks and spillover effects within and across industries are becoming increasingly relevant, especially against an increasing relevance of social media. As empirically observed in the event study literature, large operational loss events in an announcing bank or insurer can lead to significant negative spillover effects in other (non-announcing) banks or insurers, even though the firm itself did not suffer an operational loss. Reputation and spillover risk is also important under Solvency II, the new European regulatory framework, where all relevant risks of an insurer must be adequately addressed quantitatively and/or qualitatively in a holistic and comprehensive manner within pillar 1 and 2.The consideration of these spillover effects is of high relevance not only for individual firms, which may suffer financial losses, but also for investors with portfolios consisting of stocks of financial firms as well as regarding potential risk concentrations in insurance companies providing protection against operational losses and spillover effects (see, e.g., the reputation risk policy by Munich Re), for instance. Even though this is a very topical issue, to the best of our knowledge there are no quantitative models for reputational spillover effects so far, neither for single firms nor for a portfolio of firms. The aim of this project is thus to fill this gap by modeling and quantitatively assessing intra- and intersector spillover effects arising from operational loss events with focus on the insurance industry by taking into account the interaction and potential reputational spillover effects between the insurance and the banking industry. We model a network structure as the basis for the overall framework, which reflects the relationship of firms with other companies in the same or a related sector and from which (positive or negative) spillover effects may occur. We then assess spillover risks of individual firms as well as the risk of portfolios by investors or insurance contracts based on market value losses. Quantitatively assessing these spillover risks using simulation analyses based on a flexible model is highly relevant for firms to comprehensively assess risks and to identify main driving factors such as interdependencies that should be taken into account in reputation risk management beyond corporate borders.

• DFG Programme: Research Grants