Regulatory Solvency Prediction in Property-Liability Insurance: Risk-Based Capital, Audit Ratios, and Cash Flow Simulation

Cummins, J. David; Grace, Martin F.; Phillips, Richard D.

doi:10.2307/253555

Cited by 109 publications

(101 citation statements)

References 4 publications

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“…Research suggests that RBC results are not good predictors of insolvency (e.g. Cummins et al, 1995Cummins et al, , 1999. Cheng and Weiss (2012a) find that the accuracy of the RBC ratio in predicting insolvencies is inconsistent over time.…”

Section: Introductionmentioning

confidence: 99%

Risk-Based Capital and Firm Risk Taking in Property-Liability Insurance

Cheng

Weiss²

2013

Geneva Pap Risk Insur Issues Pract

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This research investigates the relationship between capital and risk in property-liability insurers from 1993 to 2007. Three-stage least squares estimation is used to investigate the relationship between capital and two types of risk: underwriting and asset risk. Overall the results suggest that risk and capital are positively related, so that capital increases are associated with increases in investment and underwriting risk. This positive relationship was not consistently significant in 1993, prior to the implementation of risk-based capital (RBC) requirements. Both under-capitalised insurers and marginally adequately capitalised insurers adjusted their capital and risk towards firm targets at a higher speed than wellcapitalised insurers in the post-RBC period. But underwriting and asset risk also increased for less well-capitalised insurers.

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Section: Introductionmentioning

confidence: 99%

Risk-Based Capital and Firm Risk Taking in Property-Liability Insurance

Cheng

Weiss²

2013

Geneva Pap Risk Insur Issues Pract

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“…Instead of using an IRIS‐based measure of firm weakness we estimate the probability of insurer failure using an insolvency model like that used in Cummins, Grace, and Phillips (1999). These estimates of insolvency risk are based on information reported to regulators, that is, information that may be manipulated with the intent to deceive regulators about a firm's true financial condition.…”

Section: Introductionmentioning

confidence: 99%

Property–Liability Insurer Reserve Error: Motive, Manipulation, or Mistake

Grace

Leverty

2011

J of Risk & Insurance

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We use two reserve error definitions found in the literature to investigate the joint impact of previously studied incentives on the magnitude of reserve error. We find many prior conclusions are dependent upon the restricted setting in which the hypotheses are tested and on the definition of the reserve error. We find strong evidence that financially weak insurers underreserve to a greater extent than other insurers. However, our evidence casts doubt on the conclusion that insurers manipulate reserves to avoid solvency monitoring. We also find insurers increase reserves for tax purposes and to reduce the impact of regulatory rate suppression.

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“…Arguably, it would constitute a significant shift 39 Cummins et al (1999). 40 Pottier and Sommer (2002).…”

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confidence: 99%

Principles for Insurance Regulation: An Evaluation of Current Practices and Potential Reforms

Klein

2011

Geneva Pap Risk Insur Issues Pract

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The recent financial crisis and its cascading effects on the global economy have drawn increased attention to the regulation of financial institutions including insurance companies. While many observers would argue that insurance companies were not significant contributors to the crisis, the role of insurance companies in the financial economy and their potential vulnerability to systemic risk have become matters of considerable interest to policy-makers and regulators. In this context, this paper examines the basic economic principles that should govern the regulation of insurance and employs these principles in assessing current regulatory practices and potential reforms. Specifically, it articulates the basic rationale for insurance regulation, which is the remediation of market failures where regulation can enhance social welfare. In insurance, the principal market failures that warrant regulatory intervention are severe asymmetric information problems and principalagent conflicts that could lead some insurance companies to incur excessive financial risk and/or engage in abusive market practices that harm consumers. This provides an economic basis for the regulation of insurers' financial condition and market conduct. At the same time, the regulatory measures that are employed to correct market failures should be efficient and effective. Judged against these principles, the systems for solvency and market conduct regulation in the United States warrant significant improvement. There appears to be little or no justification for regulating insurance rates in competitive markets and the states should move forward with full deregulation of insurance prices. The EU appears to be much farther ahead in terms of implementing best practices in the regulation of insurers' financial condition under its Solvency II initiative. It is also much closer to the desirable goal of full price deregulation than the United States.

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Regulatory Solvency Prediction in Property-Liability Insurance: Risk-Based Capital, Audit Ratios, and Cash Flow Simulation

Cited by 109 publications

References 4 publications

Risk-Based Capital and Firm Risk Taking in Property-Liability Insurance

Risk-Based Capital and Firm Risk Taking in Property-Liability Insurance

Property–Liability Insurer Reserve Error: Motive, Manipulation, or Mistake

Principles for Insurance Regulation: An Evaluation of Current Practices and Potential Reforms

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