Network analysis of the UK reinsurance market

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 28 October 2022

Staff Working Paper No. 1,000

By Artur Kotlicki, Andrea Austin, David Humphry, Hannah Burnett, Philip Ridgill and Sam Smith

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.

Network analysis of the UK reinsurance market