The Effectiveness of Public and Private Sector Summary Risk Measures in Predicting Insurer Insolvencies

Posted: 8 Mar 2003

See all articles by Steven W. Pottier

Steven W. Pottier

University of Georgia - Department of Insurance, Legal Studies, Real Estate

David W. Sommer

St. Mary's University; University of Georgia - Department of Insurance, Legal Studies, Real Estate

Abstract

This article investigates the abilities of four key summary risk measures to predict property-liability insurer insolvencies. The four summary risk measures studied are the NAIC's risk-based capital ratios, the NAIC's financial analysis solvency tools (FAST) scores, A.M. Best's Capital Adequacy Relativity ratios, and A.M. Best's ratings. The empirical tests find that the risk measures produced by the private sector are superior in predictive ability to the measures produced by regulators, perhaps because of the qualitative adjustments made by private sector analysts. The results also demonstrate that overall measures of risk are substantially better than risk-based capital measures in predicting insolvencies. Another finding is that the predictive ability of the NAIC's RBC ratios can be improved substantially if ranks are used rather than the ratios themselves.

Keywords: Risk-based capital, insolvencies, insurance regulation

Suggested Citation

Pottier, Steven W. and Sommer, David W., The Effectiveness of Public and Private Sector Summary Risk Measures in Predicting Insurer Insolvencies. Journal of Financial Services Research, Volume 21, Issues 1 & 2, February/April 2002. Available at SSRN: https://ssrn.com/abstract=382902

Steven W. Pottier

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States
706-542-3786 (Phone)
706-542-4295 (Fax)

HOME PAGE: http://www.terry.uga.edu/insurance/pottier.html

David W. Sommer (Contact Author)

St. Mary's University ( email )

1 Camino Santa Maria
San Antonio, TX 78023
United States
210-431-8055 (Phone)

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States
706-542-5160 (Phone)
706-542-4295 (Fax)

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