Introducing Early Warning System for Solvency of Iranian Insurance Companies, Using Logit Panel Data method

Abstract

Solvency is one of the essential components that illustrates financial status of an insurance company. Therefore, providing a model with considering internal and external factors which could predict decreasing solvency can improve the efficiency of this index. The main purpose of this paper is to present a model for an early warning system based on decreasing probability of solvency from its critical amount in point of supervisory authority view in Iranian insurers. To this end, based on previous studies, a number of indexes, as independent variables affecting solvency, are selected and classified as economic, financial, and corporate governance. In this respect, the empirical model of research was estimated by econometric method of logit panel data for 18 Iranian companies during 1387-1396. The results depict that interest rates and the change in board of directors have the most and the least impact on the probability of falling insurers’ solvency, respectively. Also, the impact of loss ratio differs in various quantities. Moreover, the impact of variables on probability of decreasing of solvency of insurers are verified; including macroeconomic; interest rate, economic growth and international economic sanctions, Financial variables; current ratio, loss ratio, the Herfindahl–Hirschman Index, and change in board of directors.

Keywords

• early warning system
• solvency
• insurance
• logit panel data