Document Type : Original Research Paper

Authors

• S. Bajalan
• M. Namdar

Department of Finance, Faculty of Management, University of Tehran, Iran

Abstract

The possibility of bankruptcy for insurance companies is a key factor that should be considered. In this research, by using the Thames approximation method, the final bankruptcy probability of the third party insurance portfolio of an Iranian insurance company was estimated. For this purpose, first, by using the loss data adjusted according to inflation from 2016 to 2018, the surplus function of the company's portfolio has been modeled as a compound Poisson stochastic process. According to the studies, the best distribution for modeling the distribution of damage intensity, among the different distributions investigated, is the Gamma distribution. Then, the adjustment coefficient is estimated as an important input parameter of Thames approximation using Decker's algorithm. Finally, the probability of bankruptcy has been estimated using the Thames approximation under different scenarios regarding the amount of initial surplus. The results of the research confirm the relatively high probability of the final bankruptcy of the company, which indicates the need to adopt management policies in order to reduce this probability.

Keywords

• Tijms Approximation
• Compound Poisson process
• Cramer’s Asymptotic Ruin Formula
• Ruin