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Empirical Analysis of the Risks and Resilience to Shocks of the Macedonian Insurance Sector

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Abstract

The objective of this paper is to analyse the risks to the stability of the Macedonian insurance sector and to quantify its resilience to shocks. In the empirical economic model, insurance sector stability, as measured through the log of the solvency margin, is a function of total claims settled in total gross premiums, market concentration, product concentration, deposit interest rates, inflation rate and GDP growth. The analysis covers all 11 non-life insurance companies over the period from 2008:Q4 to 2014:Q2, using panel methods and Monte Carlo simulation. The results suggest that only claims settled as a measure of individual insurance risks and the inflation rate as a measure of market risks affect the stability of the Macedonian insurance sector. Stress simulations indicate that the Macedonian insurance sector remains robust even under extreme shocks. However, the stress tests of the individual companies reveal that 3 out of 11 companies fail the stress test.

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Notes

  1. ISA (2010b).

  2. Akerlof (1970).

  3. Rothschild and Stiglitz (1976).

  4. Monti and Tagliapietra (2009).

  5. Kopcke and Randall (1991).

  6. Mourik (2003).

  7. International Association of Insurance Supervisors (2003).

  8. Doff (2008).

  9. Committee on the Global Financial System (2005).

  10. Munch and Smallwood (1980).

  11. Cummins et al. (1999).

  12. Browne and Hoyt (1995).

  13. Eling and Schmeiser (2010).

  14. Although the EIOPA stress test investigates the companies’ solvency situation in defined stress scenarios, we, in addition to the stress scenario, consider the 95th percentile of the distribution around the mean.

  15. NBRM (2014).

  16. ISA (2013).

  17. The ratio is used as a measure of undertaken risks by the insurance company in the Annual Report by National Bank of the Republic of Macedonia.

  18. ISA (2011b).

  19. Insurance Europe (2014).

  20. Insurance Europe (2011).

  21. ISA (2009, 2010a).

  22. ISA (2010a, 2011a).

  23. NBRM (2013).

  24. ISA (2010a, 2010b).

  25. Kopcke and Randall (1991); Browne and Hoyt (1995); International Association of Insurance Supervisors (2003); EIOPA (2011a, 2011b); Jobst et al. (2014).

  26. CEA (2007).

  27. Pinches and Trieschmann (1974).

  28. Harrington and Nelson (1986).

  29. Browne and Hoyt (1995); The Geneva Association, (2010a, 2010b).

  30. Jobst et al. (2014).

  31. EIOPA (2011a).

  32. CNB (2014).

  33. Komárková and Gronychová (2012).

  34. IMF (2013).

  35. e.g. European Commission (2010, p. 199).

  36. Wooldridge (2006).

  37. Judson and Owen (1999).

  38. Hausman (1978).

  39. Wooldridge (2006).

  40. Hall (2005).

  41. Baltagi (2008).

  42. Arellano and Bover (1995).

  43. Blundell and Bond (1998).

  44. Hayashi (2000).

  45. Van den End et al. (2006).

  46. Vazquez et al. (2010).

  47. Wong et al. (2008).

  48. European Commission (2010, p. 199).

  49. An alternative way would be to drop these from the analysis entirely. However, although insignificant, they still explain some of the variation in the solvency margin, so we decide to retain them. Ultimately, their dropout of the regression yields the same conclusions.

  50. (e.g. Van den End et al., 2006, use this confidence level for stress testing of the banking system).

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Acknowledgements

This research has been generously supported by The Geneva Association through the “Research grants for doctoral theses” programme. The author thanks for the guidance and useful comments of Marjan Petreski as well the comments of two anonymous referees. All remaining errors are solely the author’s.

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Petreski, B. Empirical Analysis of the Risks and Resilience to Shocks of the Macedonian Insurance Sector. Geneva Pap Risk Insur Issues Pract 40, 678–700 (2015). https://doi.org/10.1057/gpp.2015.3

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