Economic and market predictors of insolvencies in the property-liability insurance industry

This article identifies a set of factors exogenous to individual property-liability insurers that are statistically related to the overall rate of insurer insolvencies. This approach represents a departure from the methodologies of prior studies which have focused primarily on firm-specific characteristics in assessing insolvency risk. The study uses quarterly data for the period 1970 through 1990. The empirical results support the hypothesis that economic and insurance market variables are important predictors of property-liability insurer failure rates. The sensitivity of the insurer insolvency rate to two of the insurance market factors is particularly striking: A 10 percent reduction in the number of property-liability insurers results in an 82 percent reduction in the insolvency rate, all else equal. A reduction of five points in the combined ratio results in an 18 percent reduction in the insolvency rate.