The life insurer Risk-Based Capital ratio : panel data analysis



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Many studies suggest the ability of the NAIC Risk-Based Capital ratio (RBC ratio) to predict insurer insolvency. Based on the US life insurer (insurer) data for the period of 2005 to 2008, this study finds explanatory variables that have a statistically significant relationship with the RBC ratio. Advantages of panel data over cross-sectional and time series data analysis are exploited to make valid inference on coefficients of the explanatory variables. Testing for unobserved insurer and time effects and for dependence between these effects and the explanatory variables indicates the appropriateness of the fixed insurer and time effects model. Based on the ordinary least squares estimates, it is found that insurers' size, capital-to-asset ratio, and return on capital have a statistically significant relationship with the RBC ratio. Additionally, health product, annuity product, opportunity, and regulatory risks of insurers are related to the RBC ratio. Accounting for heteroscedasticity and autocorrelation for a given insurer yields the same coefficient estimates, but increased standard errors.