Network analysis of the UK reinsurance market

Artur Kotlicki (), Andrea Austin (), David Humphry (), Hanna Burnett (), Philip Ridgill () and Sam Smith ()
Additional contact information
Artur Kotlicki: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Andrea Austin: Australian Energy Regulator
David Humphry: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Hanna Burnett: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Philip Ridgill: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Sam Smith: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 1000, Bank of England working papers from Bank of England

Abstract: We provide an empirical analysis of the network structure of the UK reinsurance sector based on 2016 Solvency II regulatory data. We examine counterparty credit risk originating from reinsurance contracts as a source of financial contagion in the insurance industry. The granularity of the Solvency II data provides a new opportunity for detailed analysis of the actual exposures in the system, detection of potential systemic vulnerabilities, and reinsurance spirals. In our multi-layered network approach, we incorporate information on reinsurance contract risk types and ownership structure for both life and non-life insurers. Our findings suggest that the UK reinsurance sector exhibits the ‘small-world’ property with a scale-free, core-periphery structure and topological characteristics common to other financial networks. These characteristics of risk dispersion from the periphery to the core make the network ‘robust-yet-fragile’ to financial shocks. We explore the robustness of the network to adverse shocks through a stress-simulation exercise, where we find it robust to system wide shocks affecting the value of total investments, and to idiosyncratic shocks applied to large, highly interconnected reinsurers.

Keywords: Reinsurance; systemic risk; financial contagion; scale-free network (search for similar items in EconPapers)
JEL-codes: D85 G01 G22 G28 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2023-01-23
New Economics Papers: this item is included in nep-net and nep-rmg
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