Systemic Risk, Financial Crisis, and Credit Risk Insurance


  • We thank Andre Liebenberg, Robert Van Ness (the editor), two anonymous referees, and the participants of the 2010 World Risk and Insurance Economics Congress Meetings and the 2011 FMA meetings for helpful insights and comments. All errors are our own.

Corresponding author: School of Finance, Shanghai University of Finance and Economics, 100 WuDong Road, Shanghai, China 200433; Phone: (8621)65904556; Fax: (8621) 65103925; E-mail:


Differing from conventional insurance firms whose underwriting business does not contribute to systemic risk, credit risk insurance companies providing credit protections for debt obligations are exposed to systemic risk. We show that credit risk insurers (CRIs) underperformed conventional insurance companies during the 2007–2009 financial crisis, and such underperformance is attributed to the greater systemic risk of CRIs. We also find that the credit spreads of insured bonds increase significantly after their insurers are downgraded or put in the negative watch list. We control for alternative factors affecting bond credit spreads and the result is robust.