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A Lifecycle Approach to Insurance Solvency

Author

Listed:
  • Yuechen Dai
  • Tonghui Xu

Abstract

At present, most well-known insurance regulatory bodies focus on reviewing the solvency of insurance companies within a one-year period. However, the operation of insurance companies is a long-term business, with most policyholders planning on holding a policy over many years, not just one. This research adopts a new perspective for measuring the insolvency risk faced by insurance companies over a longer time period by estimating their full expected lifetime (the number of periods into the future that an insurer can be expected to remain solvent, given their initial capital reserves), which has significance for insurance regulation. This research uses python numerical methods to simulate the operating conditions of insurance companies with different initial reserves, and capture the period in which the company becomes insolvent. The results show that, as is logical, the higher is the initial reserve fund, the longer one can expect the company will be in business before insolvency. In addition, our simulation model helps to explain how the relevant probability density for the insolvency date, given an initial reserve fund, can be estimated. By comparing different probability density functions, we find that a lognormal density form provides a reasonable starting point for the density in question.

Suggested Citation

  • Yuechen Dai & Tonghui Xu, 2021. "A Lifecycle Approach to Insurance Solvency," Working Papers in Economics 21/13, University of Canterbury, Department of Economics and Finance.
  • Handle: RePEc:cbt:econwp:21/13
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    File URL: https://repec.canterbury.ac.nz/cbt/econwp/2113.pdf
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    References listed on IDEAS

    as
    1. Ferriero, A., 2016. "Solvency capital estimation, reserving cycle and ultimate risk," Insurance: Mathematics and Economics, Elsevier, vol. 68(C), pages 162-168.
    2. Darrell Leadbetter & Suela Dibra, 2008. "Why Insurers Fail: The Dynamics of Property and Casualty Insurance Insolvency in Canada," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 33(3), pages 464-488, July.
    3. Carson, James & Hoyt, Robert, 2000. "Evaluating the risk of life insurer insolvency: implications from the US for the European Union," Journal of Multinational Financial Management, Elsevier, vol. 10(3-4), pages 297-314, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Insurance regulation; simulation; insolvency;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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