Document Type : Original Research Paper

Authors

• Zeynolabedin Aghilifar ¹
• Sayed Yahya Abtahi ²
• Gholamreza Askarzadeh ³
• Hamid Khajeh Mahmoodabadi ³

¹ Phd Student, Department of Financial Management, Faculty of Accounting and Management, Yazd Branch, Islamic Azad University, Yazd, Iran.

² Associate Professor, Department of Economics, Faculty of Accounting and Management, Yazd Branch, Islamic Azad University, Yazd, Iran.

³ Assistant Professor, Department of Financial Management, Faculty of Accounting and Management, Yazd Branch, Islamic Azad University, Yazd, Iran.

Abstract

BACKGROUND AND OBJECTIVES: Examining the long-term relationships and cointegration among different branches of insurance is crucial for understanding risk management and financial stability in the insurance industry. These relationships emerge due to factors such as the nature of similar risks, dependence on economic variables (e.g., interest rates, inflation, or economic growth), and shared capital management in the long term. Therefore, cointegration analysis is a powerful tool for identifying long-term relationships among different insurance branches. This method helps insurance companies to adopt better risk management strategies, allocate their capital optimally, and provide better services to customers. Since the insurance market is influenced by economic, social, and environmental factors, this analysis is of great importance for improving strategic decision-making. This study investigates the dependency structure among various insurance branches using nonlinear cointegration analysis.
METHODS: In this study, the dependency structure among different insurance branches is analyzed using Johansen's linear cointegration method and Hansen and Seo's nonlinear cointegration approach, as well as the existence of equilibrium processes in their long-term relationships. For this purpose, a dataset comprising monthly claim amounts (excluding recoveries) from liability insurance, third-party insurance, and automobile body insurance is used. These branches were selected due to their non-zero and similar order of integration. The dataset spans the period from January 2011 to December 2023.
FINDINGS: The results indicate the existence of at least one linear cointegration vector among the risks of different insurance branches. However, examining the presence of nonlinear relationships among the three branches within the framework of threshold vector error correction models (TVECM) reveals that adjustments toward long-term equilibrium occur when the gap between liability and automobile body insurance claims is within or beyond estimated threshold values. Moreover, when the loss gap exceeds the threshold, the adjustment towards long-term equilibrium occurs at a faster rate. Additionally, the error correction effect is significantly stronger for liability insurance compared to the other two branches. Automobile body insurance exhibits a higher error correction rate than third-party insurance, while third-party insurance demonstrates the weakest error correction effect. The estimation of the three equations related to the long-term relationships of insurance branches shows that the error correction component in the equations related to liability insurance and body insurance is significant in both the high and low regimes. However, the error correction component in the equations related to third-party insurance is not significant in either regime. On the other hand, the error correction coefficient in the equations for liability insurance and body insurance is much higher in the high regimes than in the low regimes. In other words, when the gap between the losses in liability and body insurance is estimated to be less than or greater than the threshold values, an adjustment towards the long-term equilibrium occurs, but the adjustment process towards the long-term equilibrium occurs more rapidly in cases where the loss gap is greater than the threshold. Also, there is a much stronger error correction effect for the liability insurance branch than for the other two branches. Then, body insurance has higher error correction than third-party insurance. Finally, third-party insurance has much lower error correction than the others.
CONCLUSION: Liability insurance is exposed to high systematic risk, and macroeconomic conditions—such as high inflation rates and economic constraints due to sanctions—have led to a decline in vehicle quality and an increase in claims for third-party and automobile body insurance. Consequently, the systematic risk in the liability insurance sector has also increased, as it exhibits a high adjustment speed in its relationships with third-party and automobile body insurance. A similar pattern is observed for automobile body insurance, where an increase in third-party insurance claims can raise the systematic risk of automobile body insurance, ultimately eliminating the risk gap between these two branches in the long term. Therefore, risk and capital management in insurance companies shall account for such dependencies among insurance branches. Ignoring the adjustments in inter-branch risk relationships could expose insurance firms to significant financial losses. It is suggested that since third-party insurance has less error correction than other branches, insurance companies and policymakers in the country's insurance sector pay special attention to risk management in this sector because increasing risk in this sector, given the high adjustment speed of other insurance branches compared to third-party, can also increase the risk of other sectors and create systematic risk in the entire insurance industry. On the other hand, to optimally manage the risk of liability and body insurance, insurance companies need to pay attention to the critical loss thresholds in this type of insurance and estimate these thresholds according to the long-term relationships among losses in different insurance branches in each company.

Keywords

• Cointegration approach
• Dependence structure
• insurance risks
• Iran's insurance company

Main Subjects

• Risk assessment in insurance