Failure Risks in the Insurance Industry: A Quantitative Systems Analysis

Authors

  • Elisabeth Paté-Cornell,

    1. Elisabeth Paté-Cornell is Professor and Chair of the Department of Management Science and Engineering, Stanford University, Stanford, CA 94305; phone: 650-723-3823; fax: 650-736-1945; e-mail: mep@stanford.edu. Léa A. Deleris is Post-Doctoral Researcher at T.J. Watson Research Center, IBM Research, 1101 Kitchawan Road, 31-222, Yorktown Heights, NY 10598; phone: 914-945-1798; fax: 914-945-3434; e-mail: Lea.deleris@us.ibm.com. This article was subject to double-blind peer review.
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  • Léa A. Deleris

    1. Elisabeth Paté-Cornell is Professor and Chair of the Department of Management Science and Engineering, Stanford University, Stanford, CA 94305; phone: 650-723-3823; fax: 650-736-1945; e-mail: mep@stanford.edu. Léa A. Deleris is Post-Doctoral Researcher at T.J. Watson Research Center, IBM Research, 1101 Kitchawan Road, 31-222, Yorktown Heights, NY 10598; phone: 914-945-1798; fax: 914-945-3434; e-mail: Lea.deleris@us.ibm.com. This article was subject to double-blind peer review.
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Abstract

We present in this article the findings from a study on insolvency in the property–casualty insurance industry that was commissioned by the Risk Foundation. The Risk Foundation contacted us for this work to draw from our experience in risk analysis based on systems analysis and probability. Therefore, we provide a different perspective on failure in the insurance industry by opening the “black box” to assess the contribution of different factors to the overall risk. Besides the development of a quantitative model for insolvency risk, our study for the Risk Foundation included insights from (1) unstructured interviews with 15 insurance industry experts and with six insurance regulators in different states, and (2) a statistical analysis of insolvency data (A.M. Best) covering the 1970 through 2005 period. Our focus here is centered on the practical insights that came out of the study, rather than on the technical details that led us to those insights.

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