AN EARLY WARNING SYSTEM ON THE PROPENSITY OF SURVIVAL AND FAILURE OF NON-LIFE INSURANCE FIRMS IN THE PHILIPPINES

Eduardo T. Tornoa, Tomas S. Tiub

Abstract


Insurance insolvency is a global phenomenon and a national issue. It is an interesting part of the field of study because insurance sector plays an important role not only in the business’ risk management but also in fuelling the economic development of the country. This study examined the factors affecting survival and failure of non-life insurance firms in the Philippines and classified the survivability of the firms into strong, moderate, weak and insolvent. Selected insolvency indicators applicable to the nature of insurance business are validated through commonly used determinants of research done in foreign countries like firm-specific variables which includes firm size, profitability, premium growth, claims ratio, expense ratio, combined ratio, leverage, growth of equity, type of ownership, investment performance and operating expense to premium growth, the degree of diversification measured by Herfindahl-Hirschman Index (HHI), natural catastrophe exposure in terms of losses paid due to typhoon and losses paid due to flood, and regulatory framework expressed by paid-up capital compliance. The study used a 10-year panel data (cross-sectional and time series) of 79 non-life insurance firms in the Philippines from year 2002 to 2011 Annual Statements (AS) reported at Insurance Commission (IC). A Levene-Welch-Games-Howell one-way analysis of variance (ANOVA) using multiple comparisons measures significant determinants that describe strong, moderate, weak and insolvent firms and stochastic frontier regression (SFR) technique determines the survival and failure probability of non-life insurance companies. This study used Statistical Package for the Social Sciences (SPSS) version 17 and Frontier 4.1 program to aid in the analysis of data. The result shows that the firm size, premium growth, leverage, losses paid due to typhoon, losses paid due to flood, type of ownership, degree of diversification and paid-up capital compliance are significant factors that affect the survivability of non-life insurance firms in the Philippines. Moreover, the result of this study aids in the decision making process of the stakeholders involved in the non-life insurance industry.


Keywords


early warning system, failure, insolvency, Levene-Welch-Games-Howell, non-life insurance, Philippines, survival, stochastic frontier regression

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Journal of Business and Finance

ISSN: 2305-1825 (Online), 2308-7714 (Print)

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