Using the Z-Score to Analyze the Financial Soundness of Insurance Firms

Abstract

This paper compares six different approaches to calculate Z-score using a final dataset of 183 insurers (1,382 observations) operating in the Spanish insurance sector during the period 2010-2017. This measure of risk has widely been used in the banking literature, and it has recently been applied to the insurance sector as an indicator of financial soundness. Using different methodologies (root mean squared error, ordinary least square and system-GMM regressions), we find that the best formula for calculating Z-score is the one that combines the current value of the return on assets and capitalization with the standard deviation of the returns calculated over the full period.

Keywords: Insurance Sector, Z-Score, Economic Crisis, Financial Soundness, European Financial System

JEL Classification: G22, G28, G32, G33