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EARLY WARNING SYSTEM FOR THE EUROPEAN INSURANCE SECTOR

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Danieli L., Jakubik P.
Ekonomický časopis (Journal of Economics)
|
2022
|
vol. 70
|
issue 1
3 – 21
EN
This study proposes an Early Warning System model composed of macro-financial and company-specific indicators that could help to anticipate a potential market distress in the European insurance sector. A distress is defined as periods in which insurance companies’ equity prices crash and CDS spreads spike simultaneously. The model is estimated using a sample of 36 insurance companies that are listed. Based on a fixed-effects panel binomial logit specification, empirical evidence shows that economic overheating that could be manifested by high economic growth, inflation and interest rates have negative impact on insurance sector stability. At the company level, a drop in return on assets and price-to-book value or raising operating expenses increases the likelihood of distress occurrence.
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