Hussein Mohammad Salameh

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.

Financial soundness of insurance firms within a country tends to heavily affect its financial environment. This study will further assess the relationship between both factors with the support of a special model to test the financial soundness of insurance companies. The model could be utilized as an indicator of the stabilization of a country’s financial environment; this is done by testing the insurance companies’ falls. The methodology used was discriminant regression on the Amman Stock Exchange (ASE) to test 12 indicators that were derived from six CARMEL model parameters. The six tested parameters were: capital adequacy, asset quality, reinsurance and actuarial issues, management efficiency, earnings and profitability, and liquidity. The results have shown that 10 out of 12 indicators are significant factors. Additionally, the study proved that the CARMEL model is an applicable model to test the financial soundness of ASE insurance companies, the possibility of detecting a deviation between the actual and expected performance was barely minimum. The effect of deviation was present in eight firms out of 19, three of which were affected by the type II error (riskier deviation). The study concluded that the CARMEL model is a significant model, and the insurance firms that follow the Jordan Insurance Federation (JIF) requirements are financially sound.

The Saudi Arabia Stock Exchange (Tadawul) is one of the biggest emerging Stock Exchanges in the Middle East region. Therefore, this research aims to apply Fama and French (2015) 5-factor model on Tadawul, and compares it with the Fama and French 3-factor model and CAPM to check the applicability of the models in Tadawul and the identity of the factors that can affect stock returns. Furthermore, the Generalized Method of Moments (GMM) regression has been implemented to examine the impact between the variables in the models. Empirically, the results show that Fama and French (2015) 5-factor model is the most consistent model in comparison to the other two models in terms of explaining the cross-section of average stock returns in Tadawul. However, it is not the best according to the intercepts results of all the regressions in 2x3, 2x2, or 2x2x2x2 sorts. Besides, Fama and French (2015) 5-factor model has the highest explanatory power in most of the portfolios based on the adjusted R2 regardless of the sort (2x3, 2x2, or 2x2x2x2). Finally, the results conclude that Fama and French (2015) 5-factor model can be an applicable model in Tadawul but only market and size can affect the stock returns, while the value, profitability, and investment cannot. Accordingly, the author recommends that, as a continuation of this research, further research can be done, which investigates a model with additional factors like momentum and illiquidity.