Failure threats of insurance companies: A case study of financial environments of Jordan

Hussein Mohammad Salameh

doi:10.21511/imfi.18(3).2021.11

Abstract

Insurance firms are known to have unique financial failure characteristics that affect the financial environment of the countries. Therefore, the purpose of this study is to assess the validity of the model used in predicting the financial failures of insurance companies. The model is believed to help in stabilizing the financial environment of the countries by predicting any collapses in the insurance sector. A discriminate regression technique was used to test 28 indicators chosen from 11 financial failure model parameters. 11 parameters of the model are the following: solvency, profitability, operational capabilities, structural soundness, capital expansion capacity, capital adequacy, reinsurance and actuarial issues, management soundness, capital expansion capacity, earnings and profitability, and liquidity. The results of the study proved that 22 variables from 11 parameters were significant; the study also validated the use of the financial failure model as a stable predictor of the financial failure of ASE insurance firms. The stability of the insurance industry is interpreted through the minimum deviation between the real and measured performances. The deviation was present in 3 out of 95 observations, and it affected only 3 firms out of 19, 1 firm out of 3 turned out to be affected by the risker deviation which is the type II error distorted observation. To conclude, the study by mentioning that insurance firms are not threatened by failure or distress and the financial failure model is a valid prediction model.

Highlights

It was reported in the 1930s that a few public Jordanian firms were listed in the counter market and were able to trade shares
A major development occurred in the Jordanian Capital Market on March 11, 1999, where three new institutions named Jordan Securities Commission (JSC), Amman Stock Exchange (ASE), and Securities Depository Center (SDC) replaced the Amman Financial Market (AFM)
The Jordan Insurance Federation (JIF) was established in 1989 following a Royal Decree, which comprises licensed 24-member insurance companies; they consist of one foreign insurance company, two ‘takaful’ operators, and 22 conventional insurers, 20 out of 24 companies are listed in the Amman Stock Exchange, which gives a clear indication that the market lacks the services of reinsurance companies

Summary

Introduction

It was reported in the 1930s that a few public Jordanian firms were listed in the counter market and were able to trade shares. The first corporate bond was issued in the 1960s, which was followed up by the Amman Financial Market (AFM) launch in January 1978. A major development occurred in the Jordanian Capital Market on March 11, 1999, where three new institutions named Jordan Securities Commission (JSC), Amman Stock Exchange (ASE), and Securities Depository Center (SDC) replaced the AFM. The Jordan Insurance Federation (JIF) was established in 1989 following a Royal Decree, which comprises licensed 24-member insurance companies; they consist of one foreign insurance company, two ‘takaful’ operators, and 22 conventional insurers, 20 out of 24 companies are listed in the Amman Stock Exchange, which gives a clear indication that the market lacks the services of reinsurance companies. The operations of the Jordanian insurers were reinsured by preserving a portion of the risk, which was ceded through the reminder of the Arab and foreign reinsurance companies

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Conclusion