An Empirical Study On Solvency Prediction For Property Insurance Companies In China

Insurance industry is a special profession that conducts the risk. Inmodern society, the insurance is essential to guarantee economic circulateand to stabilize society development. Once insurance company relapsesinto insolvency or bankruptcies, it will result in reducing profits of policyholders and the insureds, damaging credit and prestige of insuranceindustry and even endangering social stability. So we must emphasize thesolvency prediction for insurance company in order to alarm insolvencybefore it becomes the fact and to carry out effective controls.In the first part, we review the domestic and international researchon the solvency prediction, and explain the concepts of solvency,insolvency and solvency margin. Meanwhile, we analyze themacrocosmic and microcosmic factors influencing insurance companies'solvency. In the second part, we make a detail explanation and comparison on the prediction indicator system used in china and theunited states, point out the limitations of china's prediction indicatorsystem and give our suggestions for improvement. Furthermore, weintroduce several typical econometrics models for solvency prediction.By comparing advantage and disadvantages of these models, we selectdecision tree a more suited model for solvency prediction. The third partis an empirical study on solvency prediction. By choosing the propertyinsurance companies with complete financial report as research cases(thedata is from 1997～2004 china's insurance yearbook), refering solvencyrate as the standard to judge a company solvency or insolvency, usingsupervisory indicators as prediction variables, we apply datemining(decision tree) software to carry out the prediction results ahead ofone year(t-1), two years(t-2) and three years(t-3). And we use signal-noiseratio margin to measure each indicator quantitatively, compare theprediction result between five indicators with larger information and allof indicators. At the end of the paper, we give out several suggestions tosolvency prediction for property insurance companies in china.