The Role of RBC, Hurricane Exposure, Bond Portfolio Duration, and Macroeconomic and Industry-Wide Factors in Property-Liability Insolvency Prediction

Networks Financial Institute Working Paper No. 2011-WP-17

44 Pages Posted: 29 Jul 2011

See all articles by Jiang Cheng

Jiang Cheng

Shanghai Jiao Tong University (SJTU)

Mary A. Weiss

Temple University

Multiple version iconThere are 2 versions of this paper

Date Written: July 29, 2011

Abstract

This research analyzes the performance of the Risk-Based Capital (RBC) ratio and other variables in predicting insolvencies in the property-liability insurance industry during the period 1994 to 2008. This research contributes to the literature by analyzing a longer period of time than previous research, testing timely variables such as exposure to hurricane prone areas and testing the role of macroeconomic and industry-wide variables in property-liability insurer insolvencies. The results indicate that the accuracy of the RBC ratio in predicting insolvencies is inconsistent over time and that some previously tested financial ratios that are part of the Financial Analysis Solvency Tools system do not always reliably predict insurer insolvency. In addition, the insolvency propensity is found to be significantly related to an insurer’s hurricane prone area exposure, changes in interest rates, the industry-wide combined ratio, and the industry-wide Herfindahl index of premiums written.

Keywords: Risk-Based Capital Ratios, Insolvency, Hurricane Exposure, Duration, Macroeconomic Factors

Suggested Citation

Cheng, Jiang and Weiss, Mary A., The Role of RBC, Hurricane Exposure, Bond Portfolio Duration, and Macroeconomic and Industry-Wide Factors in Property-Liability Insolvency Prediction (July 29, 2011). Networks Financial Institute Working Paper No. 2011-WP-17. Available at SSRN: https://ssrn.com/abstract=1898631 or http://dx.doi.org/10.2139/ssrn.1898631

Jiang Cheng (Contact Author)

Shanghai Jiao Tong University (SJTU) ( email )

KoGuan Law School
Shanghai 200030, Shanghai 200052
China

Mary A. Weiss

Temple University ( email )

Fox School of Business and Management
1801 Liacouras Walk
Philadelphia, PA 19122
United States
215-204-1916 (Phone)

HOME PAGE: http://www.sbm.temple.edu/~rmidept/weiss.html

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