Basel Committee on Banking Supervision has proposed in the New Basel Capital Accord a three pillar system of monitoring financial strength of the financial institutions (banks): minimum capital requirements, supervisory review and market discipline. The New Capital Accord, addressed mainly to a banking system, has a great impact on regulations of the securities, insurance and pension funds markets. The main subject of this paper is associated with the third pillar of the system market discipline with regard to the insurance sector.

This paper describes a simple dynamic simulation model which has been built for the purpose of testing solvency of insurance companies on the basis of the publicly available data in Poland. High level of aggregation of the model results from the source and the specificity of data. Nevertheless, these data enable to introduce market strength of insurance companies to the model.

The empirical part of the study focuses on non-life insurance companies operating in Poland in the years 1995 - 2001. The simulation was performed to assess insolvency propensity in the period from 2002 to 2006. The prediction efficiency was evaluated for the year 2002 and 2003. A hypothesis that the solvency ratio used for solvency testing follows a minima distribution was tested.

In accordance with the Polish Accounting Law, every insurance company operating in Poland has to publish yearly financial statement consisting among others of balance sheet, profit and loss account, technical account and cash flow statement. The accounting and solvency margin standards being in force in Poland since 1995 are compatible with the European Union Directives, so the model used in this research can be easily applicable to the studies of insolvency propensity of insurance companies operating in other EU countries.