How Resilient is Your Organization? From local failures to systemic risk

Christos Ellinas, Neil Allan, Neil Cantle

Research output: Contribution to conferenceConference Paper

75 Downloads (Pure)

Abstract

Empirical evidence of reported losses suggests that insurance firms are interconnected in a nontrivial way. As a result, systemic risk is a real possibility, where the failure of a single firm can have a disproportionate effect on the market by affecting firms connected to it. Systemic risk can be viewed as the result of a cascading process, as it unravels throughout a network structure. In response, this work presents a simple analytical model that can simulate this process. The model is subsequently tested upon an empirical dataset via the means of numerical simulations. Consequently, the systemic role of individual firms, both in terms of triggering a cascade or being affected by one, is established based on two novel indices: the Criticality IDX and the Sensitivity IDX. This article makes three main contributions. First, it provides a novel methodology for quantitatively and objectively assessing the systemic role of individual firms within the insurance domain. Second, it exemplifies the inability of traditional, firm-based information in serving as proxies for mapping these systemic effects. Third, it provides a practical example where network-based information (e.g., Criticality IDX, Sensitivity IDX) can outperform firm-based information (e.g., admissible assets, excess capital) resulting in increased efficiency in the decision-making process. These findings strengthen the need to account for the interconnected nature of the domain while showcasing some of the potential benefits that can be harvested by doing so.
Original languageEnglish
Number of pages16
Publication statusPublished - 12 Jun 2015
EventEnterprise Risk Management Symposium 2015 - Gaylord National Resort National Harbor, Washington, DC, United States
Duration: 11 Jun 201512 Jun 2015
http://www.ermsymposium.org/2015/index.php

Conference

ConferenceEnterprise Risk Management Symposium 2015
Abbreviated titleERM 2015
CountryUnited States
CityWashington, DC
Period11/06/1512/06/15
Internet address

Keywords

  • systemic risk
  • cascading process
  • COMPLEX NETWORKS
  • Numerical modelling
  • Decision Making
  • risk management

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