Considerations of cost trade-offs in insurance solvency surveillance policy |
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Affiliation: | 1. Bank of Italy, Italy;2. Catholic University of Milan, Italy;1. Fisher College of Business, The Ohio State University, Columbus, OH 43215, USA;2. Gabelli School of Business, Fordham University, New York, NY 10023, USA |
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Abstract: | We propose a process for identifying potentially insolvent insurers on a cost-effective basis. A loss cost function is developed such that the effectiveness of monitoring is maximized relative to a cost constraint. The loss cost function is supported by a model that provides a rank ordering of financial institutions according to their probability of insolvency. When tested against a full sample of property-liability insurance companies , the procedure provides information critical to maximizing the effectiveness of regulatory resources available for solvency surveillance and performs well as a predictor of insolvency. Likewise, the rank ordering of insurers overcomes an estimation problem critical to establishing risk-adjusted guaranty assessments. |
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