Designing a Countercyclical Insurance Program for Systemic Risk |
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| Authors: | Phelim Boyle Joseph H T Kim |
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| Institution: | 1. Phelim Boyle is in the School of Business and Economics, Wilfrid Laurier University, Waterloo, Ontario N2L 3C5, Canada. Joseph H. T. Kim was in the Department of Statistics and Actuarial Science, University of Waterloo;2. he is currently in the Department of Applied Statistics, Yonsei University, Seoul 120‐749, South Korea. The authors can be contacted via e‐mail: pboyle@wlu.ca and jhtkim@yonsei.ac.kr, respectively. The authors are grateful to two anonymous referees for their constructive and insightful comments. Both authors acknowledge the support of the Natural Sciences and Engineering Research Council of Canada. |
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| Abstract: | 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. |
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