Modeling solvency of insurance companies over time

Subject Areas : Financial Econometrics and Quantitative Methods

Danial Poshtdar ¹ , Fatemeh Saraf ² , Ghodratollah Emamverdi ³ , Norouz Noorollahzadeh ⁴

1 - Department of Finance, South Tehran Branch, Islamic Azad University, Tehran, Iran.
2 - Department of Accounting, South Tehran Branch, Islamic Azad University, Tehran, Iran.
3 - Department of Economy, Central Tehran Branch, Islamic Azad University, Tehran, Iran.
4 - Department of Accounting, South Tehran Branch, Islamic Azad University, Tehran, Iran.

Received: 2023-11-24 Accepted : 2024-09-15 Published : 2024-09-15

Keywords: Bayesian Averaging Models, Financial Solvency, Systematic Risks, Time varying Parameter, Unsystematic Risks,

Abstract :

Objective: The present study models the financial solvency of insurance companies based on Wilson’s model using the Bayesian model averaging (BMA) approach.

Methodology: This applied research selects 27 insurance companies listed on the Tehran Stock Exchange from 2006 to 2022. The financial data of these firms are used to estimate the model.

Findings: Among the BMA models, the dynamic time-varying parameter averaging model, selective time-varying parameter averaging model, and Bayesian model averaging approach demonstrated the highest efficiency in identifying the most critical variables influencing financial solvency. Consequently, 40 variables were introduced into the Bayesian model averaging framework, of which 13 were identified as non-fragile variables based on prior probabilities. According to the results of the structural vector autoregression model with an augmented time-varying parameter factor, variables such as inflation uncertainty, exchange rate, sanctions, debt ratio, total debt-to-equity ratio, long-term debt-to-equity ratio, and adjusted liabilities to current assets positively impacted financial solvency over the long term. Conversely, economic growth, liquidity ratio, return on working capital, return on investment, reinsurance surplus, and investment yield negatively affected financial solvency in the long run.

Originality/Scientific Contribution: Overall, the findings indicate that the long-term elasticity between financial solvency and research variables is stronger than short-term elasticity, highlighting the severe impact of these risks on the stability of insurance companies. The persistence of such risks could potentially lead to the bankruptcy of the insurance industry.

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