Non-Markov Effects and Property-Liability Insurer Rating Transitions

25 Pages Posted: 20 Dec 2009 Last revised: 14 Oct 2010

See all articles by Yuling Wang

Yuling Wang

Florida State University - Department of Risk Management/Insurance, Real Estate and Business Law

James M. Carson

University of Georgia

Date Written: September 29, 2010

Abstract

We extend the results of Lando and Skødeberg (2002) with the first examination of non-Markov effects for property-liability insurer rating transitions. Results provide evidence for the existence of three rating phenomena, including an initial rating effect (future rating transitions depend on the insurer’s existing rating), momentum drift (future downgrades and upgrades are associated with the insurer’s past downgrades and upgrades), and time dependence (the longer an insurer’s rating remains in a given category, the lower the likelihood that the rating will change). Based on the Cox proportional hazard model and A.M. Best ratings for the period 1995 to 2006, findings indicate the presence of significant non-Markov effects, generally for both insurer rating upgrades and downgrades, which is different from the results in the financial sector indicated by Lando and Skødeberg (2002).

Keywords: Non-Markovian Behaviors, Rating Drift, Insurer Solvency, Cox Model

JEL Classification: C14, C34, C41, G24

Suggested Citation

Wang, Yuling and Carson, James M., Non-Markov Effects and Property-Liability Insurer Rating Transitions (September 29, 2010). Available at SSRN: https://ssrn.com/abstract=1525596 or http://dx.doi.org/10.2139/ssrn.1525596

Yuling Wang

Florida State University - Department of Risk Management/Insurance, Real Estate and Business Law ( email )

College of Business
Tallahassee, FL 32306
United States
850-6442777 (Phone)

James M. Carson (Contact Author)

University of Georgia ( email )

Athens, GA 30602-6254
United States

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