A Study of Insolvency Prediction and Efficient Classification Approach for Life Insurers - Taiwan Example

The objective of insurer supervision is to monitor the financial solvency of insurance companies and protecting the rights of consumers. Improving the related legislation and regulatory policy are also goals of supervision. After the Asian crisis in July of 1997, the economic environment grew worse. Additionally, four financial impacts, including declining interest rate, liberalization and internationalization, natural or man-made catastrophe, and quot;fuzzyquot; boundary of industry affect the financial soundness of life insurers in Taiwan. quot;Profits dropped sharply in 1999, and yearly profit or loss before tax decreased 43.17 percent in 2000,quot; based on the report of Ministry of Finance. Thus, the financial insolvency prediction issue has a potential to cause a lot of people concern. This pilot study will summarize the risk of financial insolvency by examining financial risks and rating models simultaneously. The purpose of this study is first to evaluate the financial soundness by using the rating systems of the CAMEL-S and the RBC model. Further, the purpose of this study is to explore if there are significant differences of financial stability between domestic and foreign life insurers from 1998 to 2002. To construct an efficient insolvency prediction model is another main purpose of this study. In addition, when considering reducing high misclassification cost, this study found that the artificial neural network was more excellent for classification than the traditional discriminant method, since the artificial neural network contains an accurate discrimination rate of 95.2% with a lower Type I error of 0.0274, and Type II error of 0.0769