Global Loss Diversification in the Insurance Sector

We study the possibility for international diversi cation of catastrophe risk by the insurance sector. Adopting the argument that large insurance losses may be a `globalizing factor' for the industry, we study the dependence of geographically distant insurance markets via equity returns. In particular, we employ conditional copula theory to model the bivariate dependence of the insurance industry. In contrast to earlier literature on this subject, we disentangle the causes of dependence stemming from the asset side from those from the liability side by conditioning on general market conditions. We nd that for both Europe America and Europe Asia the dependence is signi cant. Moreover, we nd asymmetric e ects: the international dependence is particularly high for losses, even after conditioning for the asset side dependence. Finally, we investigate the time variation in copula parameters and nd evidence that dependence in the insurance sector has increased over time, thus reducing the scope for international diversi cation of large losses in this sector.