Cross-country evidence on the relationship between global value chain position and the tail risk of insurers

This study investigates the relationship between insurance sectors' global value chain (GVC) positions and insurance firms' tail risk. Using a sample of 208 insurers from 25 countries between 2000 and 2015, we find that insurers' tail risk (i.e., expected shortfall, downside beta, and marginal expected shortfall) increases when an insurance sector's GVC upstreamness indices increase. This result suggests that when an insurance sector becomes more upstream in the global production network, the comovement between insurers' stock returns and the market returns become stronger and insurers become more exposed to market tail risk. By testing over a subsample of non-US insurers and a sample period excluding the 2008 Global Financial Crisis, we show that our main results remain unchanged. We also use 2SLS with instrumental variables to address the potential endogeneity problem. Using the nonfinancial sectors' GVC positions as the instrumental variable, we find that the main results are robust to the bias associated with any endogeneity problem. This paper provides the first empirical evidence that highlights the role of GVC linkages in tail risk spillover among insurers around the globe. Our findings have important policy implications for the regulation of insurance firms.