1. Introduction
The financial condition of US life insurers has received widespread attention, especially with the failure of two large insurers, Mutual Benefit Life and Executive
Life, both in 1991. Failures of the magnitude of these two life insurers and the increased frequency of life insurer insolvency suggest that a reexamination of the
risk profiles of life insurers is warranted. Prior studies have been constrained by a lack of data on both insolvent and solvent life insurers. Additionally, the results of
these studies have not been consistent, either in the level of classification accuracy or in the variables they identify as significant insolvency predictors.
Insolvencies of life insurers in Europe have been virtually nonexistent see Hogan, 1995, p. 344. However, the deregulation of the European insurance market
which is resulting from the adoption and implementation of the European Union EU Insurance Directives to harmonize regulation among EU Member States is
likely to dramatically alter that situation.
1
As reported in The European Insurance Handbook, ‘the opportunities for life insurers are significant, but at the same time
competition is set to increase. Insurers will have to fight harder for market share’ Dickson and Bardwell, 1991. As this statement suggests, the European life
insurance market is changing to one with many similarities to the more competitive life insurance market in the US.
The similarities between the US life insurance market and the emerging harmo- nized market in the EU are striking. In the 1990s, life insurance premiums in the
EU were approximately 200 billion compared to US life insurance premiums of 220 billion. Over 1000 life insurers operate in the EU, which is similar to the
situation in the US. An early warning system, similar to that used in the US, has been proposed for the EU. Primary regulatory oversight is led by the state of
domicile in the US, and would rest with the regulator in the home country in the EU. Clifford Chance 1993 suggests that US insurers believe that their experience
in the US market will assist them in the single EU market. Therefore, it appears reasonable to expect that the important insolvency factors identified in this study
will be important in the increasingly competitive single insurance market of the EU.
2
Hence, a careful analysis of the factors that have affected life insurer insolvency in the US should yield some valuable information for the assessment of
potential insolvency risk in the EU’s changing life insurance market. The goal of this study is 2-fold: first, to identify significant variables in the early
detection of financially distressed life insurers; and second, to consider the impor- tance of these variables to the evaluation of life insurer insolvency risk in markets,
1
Member States include all EU countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and the United Kingdom.
The European Economic Area Agreement effectively includes Norway, Iceland and Liechtenstein in the single insurance market as well.
2
For further discussion of similarities between the two markets, see Dickson and Bardwell 1991, Clifford Chance 1993, and Hogan 1995.
such as those in the EU, where insolvencies have been infrequent, but where deregulation and increased competition promise to alter the situation in the near
future. The paucity of insolvencies among EU life insurers precludes a direct analysis of
insolvency risk based on a large sample of insolvent European insurers. However, the availability of a data sample approaching the universe of insurers in the US
allows us to stratify the sample in order to make some reasonable inferences regarding the factors that are likely to influence insolvency experience outside the
US The analysis uses logistic regression to estimate important insolvency factors. The study utilizes a data sample that approaches the universe of US life insurers,
namely, the National Association of Insurance Commissioners’ NAIC database.
2. Importance of solvency monitoring
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