A Probit Model for Insolvency Risk Among Insurance Companies

18 Pages Posted: 29 Jun 2012

See all articles by Leo de Haan

Leo de Haan

De Nederlandsche Bank

Jan Kakes

De Nederlandsche Bank - Monetary and Economic Policy Department

Date Written: April 1, 2012

Abstract

We estimate a probit model of insolvency risk, using a dataset of about 400 Dutch insurance companies during the period 1995-2005. The results suggest that surplus capital, company size, profitability, long-tailed business and being a mutual insurer reduce the risk of insolvency. The model can be used to identify insurers with high insolvency risk one year ahead. It is shown that the choice of the threshold above which an insurer is classified as having high insolvency risk, is an important determinant of the relative occurrence of type I and type II prediction errors. We use a loss function to find the optimal threshold given the supervisor’s relative preference with respect to missing insolvencies and false alarms.

Keywords: Probit model, Insolvency risk, Insurance

JEL Classification: G22, G32

Suggested Citation

de Haan, Leo and Kakes, Jan, A Probit Model for Insolvency Risk Among Insurance Companies (April 1, 2012). Frontiers in Finance and Economics, Vol. 9, No. 1, 33-50. Available at SSRN: https://ssrn.com/abstract=2096130

Leo de Haan (Contact Author)

De Nederlandsche Bank ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands
+31 20 5243539 (Phone)
+31 20 5242514 (Fax)

Jan Kakes

De Nederlandsche Bank - Monetary and Economic Policy Department ( email )

Westeinde 1
1017 ZN Amsterdam
Netherlands

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