Insurance and Banking Interconnectedness in Europe: The Opinion of Equity Markets

Conditional expected shortfalls calculated for European insurance companies and banks under stressed market conditions are shown to be of similar magnitudes. Measured at 95% and 99% stress levels, on data covering the period from 1995 to 2011, the equity-return tail losses of insurance undertakings and banks are indistinguishable. Granger causality analysis, on all pairs of banks and insurance companies included in the sample, shows that banks and insurance companies have equal propensity to cause each others price movements. Even though the business model of insurance undertakings is different from the business model typically applied by banks, and even though insurance companies are not depending to a similar degree on short term funding as banks, the empirical results indicate that the financial equity markets in Europe do not differentiate their trading of banks and insurance companies in periods of stress.