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

Author

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  • Jiang Cheng
  • Mary A. Weiss

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.

Suggested Citation

  • Jiang Cheng & Mary A. Weiss, 2011. "The Role of RBC, Hurricane Exposure, Bond Portfolio Duration, and Macroeconomic and Industry-wide Factors in Property-Liability Insolvency Prediction," NFI Working Papers 2011-WP-17, Indiana State University, Scott College of Business, Networks Financial Institute.
  • Handle: RePEc:nfi:nfiwps:2011-wp-17
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    File URL: http://www.indstate.edu/business/sites/business.indstate.edu/files/Docs/2011-WP-17_Cheng_Weiss.pdf
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    References listed on IDEAS

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    1. Petroni, Kathy Ruby, 1992. "Optimistic reporting in the property- casualty insurance industry," Journal of Accounting and Economics, Elsevier, vol. 15(4), pages 485-508, December.
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    Cited by:

    1. Eling, Martin & Jia, Ruo & Schaper, Philipp, 2017. "Get the Balance Right: A Simultaneous Equation Model to Analyze Growth, Profitability, and Safety," Working Papers on Finance 1716, University of St. Gallen, School of Finance.
    2. repec:pal:gpprii:v:43:y:2018:i:3:d:10.1057_s41288-017-0074-z is not listed on IDEAS

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