Market risk, interest rate risk, and interdependencies in insurer stock returns: A system-GARCH model

We demonstrate significant interdependencies in stock returns across different segments of the insurance industry. Return interdependency is strongest between property and casualty (P&C) and accident and health (A&H) insurers, and weakest between life (Life) insurers and insurers from the other segments. We do not find empirical support for the existence of significant volatility transmission across the three segments. In terms of market and interest rate betas, we find that market risk is greatest for A&H insurers, followed by Life insurers and P&C insurers, while interest rate sensitivity is greater for Life insurers than that for A&H and for P&C insurers. The findings on stock return interdependencies across insurance segments complement research on diversification and focus strategies, while the results on market and interest rate risk complement the literature on insurer financial strength