Solvency Prediction for Property-Liability Insurance Companies: Evidence from the Financial Crisis

The financial crisis of 2008 generated sizeable losses in the financial sector around the world. Because regulators are used for predicting insurers' financial strength in order to detect financially distressed firms as early as possible, we question how reliably regulators can forecast financi...

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Bibliographic Details
Published in:Geneva papers on risk and insurance. Issues and practice 2015-01, Vol.40 (1), p.47-65
Main Authors: Rauch, Jannes, Wende, Sabine
Format: Article
Language:English
Subjects:
Capital requirements
Economic crisis
Economics and Finance
Failure
Finance
Financial services
GDP
Gross Domestic Product
Insurance
Insurance companies
Insurance coverage
Insurance industry
Insurance premiums
Investments
Liability insurance
Losses
Macroeconomics
Original Article
Policyholders
Property & casualty insurance
Ratios
Recessions
Regulation
Risk Management
Securities markets
Solvency
Studies
Trends
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Summary:The financial crisis of 2008 generated sizeable losses in the financial sector around the world. Because regulators are used for predicting insurers' financial strength in order to detect financially distressed firms as early as possible, we question how reliably regulators can forecast financial strength, especially during a financial crisis. We use the company-level data of German property-liability insurers from 2004 to 2011 to examine factors that affect the insurer's regulatory solvency ratio. Furthermore, we develop a prediction model to classify the insurers regarding their financial strength. We show that, in particular, the lagged solvency ratio can be used to predict the future regulatory solvency ratio irrespective of the economic conditions. Thus, our results imply that German regulators are able to detect insurers in financial distress early enough to take appropriate actions to protect policyholders' interests. Our results do not support the adoption of tighter regulations or higher capital requirements.
ISSN:1018-5895
1468-0440
DOI:10.1057/gpp.2014.16