A Study On Non-Life Insurance Products For Investment Operation

Non-life insurance products for investment have been developed for a short period in China, with inadequate operational experiences and limited theoretical studies. The reseach on non-life investment policies as described in the present paper was conducted against such a backdrop. Theorectical studies of non-life investment products are necessary for the Chinese insurance industry to keep up with the reform and opening-up process with entrepreneurship and innovation and to serve the overall interest of national economic development. They are also required in order to "effectively increase the people’s asset-based income" and "effectively protect the interests of consumers of insurance products" according to the people-oriented philosophy. For both industry practitioners and consumers, the question that such a research addresses is not whether non-life investment products should be developed but rather how they can be developed.The present paper tackles the realities of the Chinese insurance market and focuses on the theme of optimal balance between development and risks by mastering rules of development, innovating concepts of development and transforming mode of development. Following a line of thinking from puzzles to risks and then development, the paper is divided into 8 chapters focusing on four areas including mode of operation, profitability, risk prevention and market regulation of non-life insurance products for investment.The paper finds the mode of operation of non-life investment policies a question that appears at a certain stage of development of the Chinese non-life insurance sector. On the basis of analysing the Japanese and Korean models of non-life investment policies business and looking into the Huatai non-life investment policies in China, the paper concludes that in developing this business a principle of gradual development should be followed focusing on risk guarantee lines. Insurers should start from low-risk businesses and move gradually to higher risk products and from defined benefits to non-defined benefits. They must also work to obtain a full understanding of the interactions between the capital market, money market and insurance market, master the laws governing the cyclical changes on these markets and appropriately readjust the proportions between non-life investment policies and traditional products accordingly. In light of the basic features of non-lifet investment products and mindsets of insurance customers, appropriate distribution channels should be chosen and explicit risk disclosure should be made so that insurance products are sold through appropriate distribution channels and to appropriate customers.As to the profitability of the non-life investment product business, on the basis of research, the author is of the view that the nature of an insurance product determines its profitability model. Products of different features have varying profitability models. In other words, non-life investment policies have a profitability model different from that of traditional products. Whereas traditional policies have a signle stream of underwriting profits, non-life insurance products have a profitability model combing underwriting profits, investment returns and service charges.While analyzing the profitability model of non-life investment product business, the paper discusses two different types of products:defined benefit product and non-defined benefit product. In the analysis of the former, it is found by establishing the basic profit making formula, Rp+R r= (pq-pL-Cp)+[A0 (rt-r0)-C r0] that the optimal insurance premium rate p is determined by not only the underwriting losses but also by the insurance company’s operation cost Cp. The defined rate r0 depends not only on the investment return of insurance fund, but also on the insurance company’s operational cost CrO. By analyzing the profitability model of non-defined benefit product, the author finds that by establishing the profit making formula R= aB0+b Xt-B0 (c1+c2)-pL, the investment return of non life insurance product of investment nature depends on the one hand on the investment results of the insurer, whose investment strategies or portfolio mix have a direct bearing on investment returns, thereby influencing results of non-defined benefit products. On the other, the profitability also depends on the policy design especially liability clauses. If the insured has a higher requirement for risk protection function, the insurer may charge a relatively higher premium rate. Otherwise it will be just opposite. Undoubtedly, marketing cost of non life insurance product of investment function is another important factor influencing the profitability of non-life investment policies. To enhance quality of insurance business management and reduce sales cost of insurance product is not only a theoretical question for insurers to explore but also an actual problem for them to resolve.The paper also discusses about risk prevention in non-life investment product business. Researches suggest that non-life invesment policies are not only a profitable business but also a risky business. Compared with other businesses of risks, this one is rather complex. Operational risks of traditional non-life policies mainly come from pricing, in other words, a singular risk with premium revenue inadequate to satisfy compensation needs. In comparison, non-life investment policies involve a host of operational risks. Analysis of this paper reveals that in the operation of defined benefit non-life investment products, the direct reason for loss or even bankruptcy of an insurer is that returns on money operation can not satisfy at the same time loss cost, defined benefit payment and other cost expenditures, resulting in erosion of insurance capital fund. There are both external and internal factors for failure in the operation of defined benefit investment products. In this connection, insurers must mind not only external risks such as macro economy and market but also design and development philosophy of the releveant products as well as internal risks such as misleading sales.The risks of non-defined benefit investment policies are quite different from defined benefit ones. Although the insurer is also exposed to underwriting risk, it is possible for the interest rate risk to be given to the customers. Changes in investment returns only affect insurer’s profits through investment management charges. External risk factors are not transferred through interest rate but rather through sales. When the econony grows and the capital market is robust, the products sell well, leading to increasing charges collection and therefore more profit. When the economy goes into recession and the capital market is weak, the products are difficult to sell, resulting in shrinkage of fund assets which then leads to lower charges or loss. To a certain extent, this fee-based profitability of model of non-defined benefit investment produts strongly corelates with the market. In this situation, timing by the insurer is essential. In other words, it is the internal risk factor rather than external risk factor of insurance company that will have significant influence on the results of non-defined benefit investment policies.Given the complex and changing risks involved in the business of non-life investment products, the paper stresses specific risk prevention measures have to be integrated in the whole business system. First, in the stage of product development, a scientific viewpoint has to be in place, realising that development of non-life investment policies is not a speculative choice in the development of the insurance company but rather a strategic choice to enhance risk management capability and expand risk management service areas. A scientific product portfolio strategy should be formulated to watch the underwriting cycle and economic cycle, master the rules of cyclical changes and choose rational product mix on the basis of the two cycles. Efforts should be made to ensure the uniqueness of non-life investment policies developed so as to avoid introducing identical products to the market without clear definition of target customers. Second, at the product sales stage, measures such as scientific management of distribution channels, education and training of sales people and standard product information should be adopted to attract attention from costomers and satisfy their needs. Finally, during the stage of money operations, the skills of management and investment of product managers must be improved and insurance funds investment system and risk management must be established to realise value preservation and addition of the insurance funds.The paper further points out that given the different risk features between non-life investment products and traditional insurance policies the government has introduced different regulatory measures. First, in solvency regulation, insurers of non-life investment policies have to both satisfy capital requirement and maintain a certain scale of business development. The capital requirement and business scale influence and restrain each other. The amount of capital supports scale of businesss development and business scale is preconditioned by amount of capital. It is provided that non-life investment products of different features have to be supported by required amounts of capital respectively. The capital allocation determined by product nature is reflected in different capital regulation. To exercise a categorized matching principle and strengthen capital proportion regulation is a necessary choice to regulate the market of non-life investment products. Second, in the areas of asset portfolio regulation, this paper stresses the need to introduce the concept of a prudent person on the basis of quantified restriction. An insurance asset portfolio regulation suited to Chinese national conditions should be researched into and determined according to the liability features of insurance products, risk management levels of insurers, state of development of domestic capital market and international insurance asset structure so that a relative balance between the government and the market can be realized in the regulation insurance asset portfolio in the non-life investment insurance business. Thirdly, in information disclosure, the paper finds it necessary to form a new market-based information disclosure mechanism following the public, fair, timely and adequate principles. With this, it is hoped that insurers are obliged to disclose in full operational inforamtion concerning their non-life investment products to the market and public so as to make it possible for the customers to make the right choices and create conditions for stable development of insurance companies.It is stressed in this paper that the purpuse of regulatory measures targeting the operational risks of non-life investment products is not purely for risk prevention. Rather, they are desgined to protect the interests of consumers and realise a balance of risks and development of the business. Strengthened regulation is not in conflict with the development of non-life investment businesses. The increasingly stringent regulations exercised by the China Insurance Regulatory Commission constitute an important measure to prevent operational risks in the insurance sector and ensure scientific development of non-life investment products. In a sense, the regulatory measures actually demonstrate the government’s support and encouragement to the development of non-life insurance products for investment.Although the paper establishes a basic theory of non-life investment product development and proposes basci developmen strategies, it does not carry out quantified analysis of factors influencing development of the relevant products due to their short period of development in China and inadequate data. It is the view of the author that development of non-life investment products is a brand new topic which requires further attention and research. The author will continue to follow closely developments and practices in the industry and the relevant theorectical researches.