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Using rough sets to predict insolvency of Spanish non-life insurance companies

Segovia Vargas, María Jesús and Gil Fana, José Antonio and Heras Martínez, Antonio and Vilar Zanón, José Luis and Sanchís Arellano, Alicia (2003) Using rough sets to predict insolvency of Spanish non-life insurance companies. [Working Paper or Technical Report]

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Abstract

Insolvency of insurance companies has been a concern of several parties stemmed from the
perceived need to protect the general public and to try to minimize the costs associated to this problem
such as the effects on state insurance guaranty funds or the responsibilities for management and auditors.
Most methods applied in the past to predict business failure in insurance companies are techniques of
statistical nature and use financial ratios as explicative variables. These variables do not normally satisfy
statistical assumptions so we propose an approach to predict insolvency of insurance companies based on
Rough Set Theory. Some of the advantages of this approach are: first, it is a useful tool to analyse
information systems representing knowledge gained by experience; second, elimination of the redundant
variables is got, so we can focus on minimal subsets of variables to evaluate insolvency and the cost of
the decision making process and time employed by the decision maker are reduced; third, a model
consisted of a set of easily understandable decision rules is produced and it is not necessary the
interpretation of an expert and, fourth, these rules based on the experience are well supported by a set of
real examples so this allows the argumentation of the decisions we make.
This study completes previous researches for bankruptcy prediction based on Rough Set Theory
developing a prediction model for Spanish non-life insurance companies and using general financial
ratios as well as those that are specifically proposed for evaluating insolvency of insurance sector.
The results are very encouraging in comparison with discriminant analysis and show that Rough
Set Theory can be a useful tool for parties interested in evaluating insolvency of an insurance firm.

Item Type:Working Paper or Technical Report
Uncontrolled Keywords:Empresas
Subjects:Social sciences > Economics > Insurance
Series Name:Documentos de Trabajo de la Facultad de Ciencias Económicas y Empresariales
Volume:2003
Number:02
ID Code:6801
Deposited On:30 Nov 2007
Last Modified:06 Feb 2014 07:51

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