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Disaster Severity, Frequency, and Financial Market Volatility: Evidence from the European Insurance Sector and the Role of Solvency II

Loikala, Rebecka LU (2025) NEKP01 20251
Department of Economics
Abstract
This study aims to investigate the impact of natural disasters on stock market returns and volatility in the European insurance sector using daily financial data from 3 January 2000 to 2 January 2025. This is done by implementing a GARCH(1,1) model to both the STOXX Europe 600 Insurance index and the broader Euro STOXX 600 index, as well as firm-level data for five of the largest European insurers: Allianz SE, AXA, Generali, Munich Re, and Zurich Insurance. The study investigates how disasters affect market reactions by including severity and rarity variables, and whether the introduction of the Solvency II framework in 2016 has changed how financial markets respond to the occurrence of such events. The results show that natural disasters... (More)
This study aims to investigate the impact of natural disasters on stock market returns and volatility in the European insurance sector using daily financial data from 3 January 2000 to 2 January 2025. This is done by implementing a GARCH(1,1) model to both the STOXX Europe 600 Insurance index and the broader Euro STOXX 600 index, as well as firm-level data for five of the largest European insurers: Allianz SE, AXA, Generali, Munich Re, and Zurich Insurance. The study investigates how disasters affect market reactions by including severity and rarity variables, and whether the introduction of the Solvency II framework in 2016 has changed how financial markets respond to the occurrence of such events. The results show that natural disasters generally give rise to negative returns and higher levels of volatility in the insurance sector, while the broader market shows weaker and less consistent effects, particularly after the implementation of Solvency II in 2016. At the firm level, direct insurers like Allianz and AXA tend to show negative effects, while reinsurers such as Munich Re show positive responses. This supports the “gaining from loss” hypothesis. Severity and rarity also affect returns across firms, but the sign of the effect varies. Lastly, volatility shows high levels of persistence in all models. Thus, these results suggest that while insurers remain exposed to natural disaster risk, regulatory changes like Solvency II may have reduced the systemic risk to the broader market. This highlights the importance of heterogeneity among insurers and the role of regulatory frameworks in affecting financial market responses. (Less)
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author
Loikala, Rebecka LU
supervisor
organization
course
NEKP01 20251
year
type
H2 - Master's Degree (Two Years)
subject
keywords
natural disasters, insurance sector, GARCH, Solvency II, financial market volatility
language
English
id
9193139
date added to LUP
2025-09-12 11:12:37
date last changed
2025-09-12 11:12:37
@misc{9193139,
  abstract     = {{This study aims to investigate the impact of natural disasters on stock market returns and volatility in the European insurance sector using daily financial data from 3 January 2000 to 2 January 2025. This is done by implementing a GARCH(1,1) model to both the STOXX Europe 600 Insurance index and the broader Euro STOXX 600 index, as well as firm-level data for five of the largest European insurers: Allianz SE, AXA, Generali, Munich Re, and Zurich Insurance. The study investigates how disasters affect market reactions by including severity and rarity variables, and whether the introduction of the Solvency II framework in 2016 has changed how financial markets respond to the occurrence of such events. The results show that natural disasters generally give rise to negative returns and higher levels of volatility in the insurance sector, while the broader market shows weaker and less consistent effects, particularly after the implementation of Solvency II in 2016. At the firm level, direct insurers like Allianz and AXA tend to show negative effects, while reinsurers such as Munich Re show positive responses. This supports the “gaining from loss” hypothesis. Severity and rarity also affect returns across firms, but the sign of the effect varies. Lastly, volatility shows high levels of persistence in all models. Thus, these results suggest that while insurers remain exposed to natural disaster risk, regulatory changes like Solvency II may have reduced the systemic risk to the broader market. This highlights the importance of heterogeneity among insurers and the role of regulatory frameworks in affecting financial market responses.}},
  author       = {{Loikala, Rebecka}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Disaster Severity, Frequency, and Financial Market Volatility: Evidence from the European Insurance Sector and the Role of Solvency II}},
  year         = {{2025}},
}