Market Risk, Interest Rate Risk, and Interdependencies in Insurer Stock Returns: A System-GARCH Model

Abstract

We examine market, interest rate risk, and interdependencies in returns and return volatilities across three insurer segments within a System-GARCH framework. Three main results are obtained: market risk is greatest for accident & health (A&H) insurers, followed by life (Life) and property & casualty (P&C) insurers, interest rate sensitivity is negative and greatest for Life insurers, and interdependencies in returns are significant with the magnitude being strongest between P&C and A&H insurers and weakest between Life insurers and insurers from the other segments. The implication is that greatest diversification benefits arise between Life and the other segments of the insurance industry. Market and interest rate risk for diversified firms are smaller than for non-diversified firms for both product and geographic diversification.

Keywords: Insurance, Stock Returns, Interest Rates, Diversification, System-GARCH

JEL Classification: G22, G34, K23, L11