Academy of Accounting and Financial Studies Journal (Print ISSN: 1096-3685; Online ISSN: 1528-2635)

Abstract

Value-At-Risk Models For KSA Insurance Markets: Conventional and Takaful

Author(s): Habib Hasnaoui

The purpose of this paper is to select the best VaR specification for the Insurance listed companies in an emerging economy, KSA. The author debated of the decoupling hypothesis of the Islamic insurance stocks (Takaful insurance companies) from the conventional insurance stocks (Mutual insurance companies). The author estimated the value at risk for the KSA insurance industry. The author also reconsidered the efficiency of a family of asymmetric ARCH models to assess the potential financial risk for daily stock returns. The researcher specifically accounted for the stylized facts of right-fat tails and skewed distribution of returns via the skewed Student distribution. The author also applied the Kupiec’s (1995) and Engle and Manganelli (2004) tests to check the performance of each model. The study found that the APARCH model with Skewed distribution records the best forecasting ability for both Takaful and Conventional insurance companies. The decoupling hypothesis of Takaful insurance companies from Mutual insurance companies has been rejected. The study provides some valuable insights on risk management for the Insurance industry in KSA. Policy makers have to take into consideration fat tails and asymmetric return distribution in assessing risk for both Takaful and Mutual insurance companies. The results have practical implications for the Insurance and Financial industry in KSA and in emerging stock markets.

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