In Search of Candidate Predictor Variables: Financial Statement Analysis in the Property/Casualty Insurance Industry

The author attempts to provide a set of meaningful predictor and analytic variables to promote future efforts to conduct both solvency surveillance and financial statement analyses of property casualty insurance companies. Among the variables proposed are (1) inadequate pricing attributable to improper underwriting, (2) an inability to forecast costs, (3) tort law changes increasing costs, (4) catastrophic potential of liability insurance, (5) increased volatility of P&C books of business, (6) cash flow underwriting practices, and (7) fraud and dishonesty. The discussion offers a qualitative explanation of the relationship each variable may have to the modeling, rather than an empirical study of historical insolvencies.