SRISK as a Measure of Systemic Risk for Insurers: Oversimplified and Inappropriate

Acharya et al define SRISK as a macro-finance measure of systemic risk to furnish “an estimate of the amount of capital that a financial institution would need to raise in order to function normally if we have another financial crisis.”  SRISK measures the “expected capital shortfall” of an institution during a financial crisis, defined as the “projected market capitalization” if equity markets declined by 40% based on historical stock market correlations (i.e. equity beta) minus the “prudent market capitalization,” defined as greater than or equal to 8% of total assets, a leverage ratio.

Acharya and Richardson use SRISK to argue that select insurers are as vulnerable to large capital shortfalls as are banks in stressed macroeconomic environments. In this paper, we argue the inappropriateness of SRISK as a measure of systemic risk for insurers.

SRISK for Insurers