Volume 13, Issue 1 -

Several countries outside the European Union consider adopting its solvency regulation for their insurance industries. However, Solvency I and (to a lesser extent) Solvency II were found to run the risk of inducing more rather than less risk-taking by insurers (Zweifel, Peter. 2014. “Solvency Regulation of Insurers: A Regulatory Failure?” Journal of Insurance Issues 37 (2): 135–157.). Companies are led to neglect parameters that link them to developments in the capital market when determining their endogenous perceived efficiency frontier (EPEF), causing it to become steeper. Given homothetic risk preferences, senior management is predicted to opt for increased rather than reduced volatility. By way of contrast, if modeled after Basel III for banks, planned Solvency III will ask insurers to take developments in the capital market into account in their formulation of business strategies designed to ensure solvency (Principle 5 of Basel III ). In addition, the stipulated decrease in their leverage ratio is shown to reduce the slope of the EPEF for insurers with little solvency capital. Contrary to its predecessors, Solvency III is therefore predicted to make insurers take on less risk, which argues for its for adoption beyond the European Union if properly implemented.

The ability of an insurer to pursue and collect money from responsible third parties for paid claims is referred to as subrogation. For some insurers, the amount to be recovered may be significant and, if accrued for, represents an estimate that could be used by management to affect earnings. This study investigates factors associated with insurers’ choice to accrue subrogation for statutory accounting. For statutory accounting, where insurers can choose whether to accrue subrogation or exclude it as an offset to the claims liability, we find that publicly-traded (mutually-owned) insurers are significantly more (less) likely to accrue subrogation than privately-owned insurers. In addition, we find that publicly-traded (mutual) insurers with weak ratings are less (more) likely to accrue subrogation. Finally, we find that insurers with large amounts of subrogation are more likely to accrue subrogation, consistent with these types of insurers having the strongest incentive to influence earnings through the subrogation accrual. Our results provide evidence suggesting that insurers respond to their incentives when choosing whether to accrue subrogation for statutory reporting.

This paper presents a model of dynamic monitoring and forecasting of key financial indices of U.S. insurers. The key financial indices are assumed to be cyclically time-varying correlated and are selected according to their impact on the soundness of the insurers. It also presents a new kind of control chart, μr{\mu _r} chart, based on the weighted average of standardized financial indices. Three kinds of objective functions are applied to determine the optimal weights: (1) minimizing the probability of a missed alarm; (2) minimizing the volatility of the weighted average of standardized financial indices; and (3) minimizing the expected shortfall of the weighted average of standardized financial indices. We note that the optimal weights are equal weights no matter which objective function is selected. The control technique presented in this paper can be extended to monitor the soundness of other insurance firms in a cyclical environment.

This paper examines the relationship between equity incentives and stock price crash risk in China’s A-Share Market, and finds a significantly positive relationship between equity incentives and crash risk. This result holds true when only executives’ incentives are involved, while the significance fades once non-managerial personnel’s incentives are considered, indicating a tendency for managers to manipulate the stock price when their interests are tied to the market value of the stock. This manipulation, however, can cause the stock price to suffer in subsequent years.