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Dynamic Monitoring and Forecasting of the Soundness of U.S. Insurers in a Cyclical Environment

Author

Listed:
  • Mao Hong

    (Shanghai Second Polytechnic University, Shanghai, China)

  • Hao Wei

    (State Farm Insurance, Bloomington, Illinois, USA)

Abstract

This paper presents a model of dynamic monitoring and forecasting of key financial indices of U.S. insurers. The key financial indices are assumed to be cyclically time-varying correlated and are selected according to their impact on the soundness of the insurers. It also presents a new kind of control chart, μr{\mu _r} chart, based on the weighted average of standardized financial indices. Three kinds of objective functions are applied to determine the optimal weights: (1) minimizing the probability of a missed alarm; (2) minimizing the volatility of the weighted average of standardized financial indices; and (3) minimizing the expected shortfall of the weighted average of standardized financial indices. We note that the optimal weights are equal weights no matter which objective function is selected. The control technique presented in this paper can be extended to monitor the soundness of other insurance firms in a cyclical environment.

Suggested Citation

  • Mao Hong & Hao Wei, 2019. "Dynamic Monitoring and Forecasting of the Soundness of U.S. Insurers in a Cyclical Environment," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 13(1), pages 1-15, January.
    • Handle: RePEc:bpj:apjrin:v:13:y:2019:i:1:p:15:n:3
    DOI: 10.1515/apjri-2018-0006
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    References listed on IDEAS

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    1. Korn, Olaf & Koziol, Christian, 2006. "Bond portfolio optimization: A risk-return approach," CFR Working Papers 06-03, University of Cologne, Centre for Financial Research (CFR).
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