The Research On The Integrated Risk Management In Chinese Property-casualty Insurance Company By Economic Capital

Since1990s, lots of the famous corporate bankruptcy cases including thebankruptcy of Barings Bank in1995make people aware that the bankruptcy ofmodem enterprises is not only related one risk or independent risk, but the integratedeffects of financial risk, market risk and operational risk. So, if we still use thetraditional separate risk management method to manage the risk faced by modernenterprises, it will be powerless. Under that background, the idea of integrated riskmanagement eventually gave birth to produce. And it firstly widely used in thebanking industry. As the development of the mixed operation between bankingindustry and the insurance industry, the advanced method of integrated riskmanagement gradually is accepted by insurance companies. But in our country,insurance industry is still on the integration of risk management study for the initialstage, this paper attempts to learn from international commercial banks and insurancecompanies‘advanced integrated risk management philosophy, experience andmethods, and establish integrated risk management framework of China’s PropertyInsurance Company. In order to be able to provide a reference integration of riskmanagement theories and management practices on China’s Property-CasualtyInsurance Company.The dissertation is―The Research on the Integrated Risk Management in ChineseProperty-Casualty Insurance Company‖. The main steps of the Integrated RiskManagement are risk identification, risk measurement, risk limitation management,risk mitigation and the monitorment and adjustment of the Integrated RiskManagement (IRM).The risk identification, which determines that whether the company can use IRMwell, is the basic for Chinese property-casualty insurance companies to implement theIRM. Since now, there is still no uniform criterion to classify the risks, but moststudier agree that market risk, credit risk, underwrite risk and operational risk shouldcontain in the risks of the property-casualty insurance companies. So, the risk classification of this paper is market risk, credit risk, underwrite risk and operationalrisk.The risk measurement is based on the risk classification, and the key for riskmeasurement is the choice of the risk measurement functions. Also, there are lots ofrisk measurement functions, for example, Delta, Vega, Gamma, but they do not meetthe characteres of the risk measurement functions of IRM, which contain thatmeasurement of the risks‘classification, comparement and assessment. As a new riskmeasurement function, Economic Capital (EC) perfectly satisfies all three characters,and has developmed as a standard method using to measure the integrated risks.For the problem of the measurement of the risks using EC, this paper usesdifferent methods to measure different risks by their own characters, not onlyincluding the Copula method. For example, in the part of the market riskmeasurement, as there are lots of history data to do the goodness of fit test, we choosethe Copula method to measure the market risks; in the part of the underwrite riskmeasurement, as there is not enough data for the short insurance history in China, it isdifficult to do the goodness of fit test if we use the Copula method. So it is sensiblefor us to choose another method, such as comonotonicity method.The risk limitation management is the key for the IRM. At present, there are fourkinds of risk limitations: concentration of risk limitation, sensation of risk limitation,stop-loss risk limitation and the EC risk limitation, and the EC risk limitation whichreprensents of the development of the risk limitation management uses more thanothers. So, the study focuses on the EC risk limitation. The EC risk limitationmanagement contains four different steps: the frist one is that insurance companydetermine the total EC risk limitation by lots of informations, such as the capitalstrength, targets of shareholders, risk appetite, and the policies and regulations of theregulators; the second one is that insurance company allocats the total EC risklimitation by the NAPM and proficiency of the risk units; the third one is to monitorthe implement of the risk limitations, at the same time dynamicly adjust the allocationby the monitor results; the last one is that must start the risk mitigation management ifthe real risk limitations are larger than the risk limitations, untile the real risk limitations are lower than the risk limitations.If an insurance company wants to get same benefit, the company must take samerisk, which must be included in the risk limitation management. But for the other risk,the company must start the risk mitigation management. There are three methods tomitigate the risks: risk control, risk financing, and internal risk rejection. Recently, asthe development of the financial market and the insurance market, there are also newrisk financial methods. The represent methods are Finite Risk reinsurance andInsurance Risk Securitization. Insurance companier must choose the total methods tomitigate its risks.IRM is the newest fruit of the development of the classic risk management method,reprent of the forefont of the risk management theories. This paper has four maininnovations:Firstly, for the definition of the IRM, the paper gives a new definition which is notonly different from the definition of the EC, but also different from the definition inthe COSO frame which has been widely accept. In this paper, IRM should containrisk identification, risk measurement, risk limitation management, risk mitigation andthe monitorment and adjustment of IRM. The definition of the IRM is different fromthe classic risk management, but is still related to the classic risk management, whichis an innovation.Secondly, the paper thinks that comonotonicity method is a much better one tomeasure the underwriting risks for the property-casualty insurance companies. A morewidely used method to measure risks is Copula method, but Copula method needs somuch data that it is very hard for the property-casualty insurance companies to use theCopula method to measure the underwriting risks. If we must use this method tomeasure the underwriting risks, there are many problems. Such as, because of the lackof the goodness of fit tests, the results will be significantly different by differentCopula functions. Using the comonotonicity method can offset the defects of theCopula method, and improve the precision of the risk measurement.Thirdly, considering the fact that there is only little data for the underwriting risks,the paper uses the comonotonicity method to measure the underwriting risks for the Property-Casualty Insurance Company, which can avoid the defects of the Copulamethod.Fourthly, the paper is much earlier than others to analysising quantitatively andmodeling of integrated risk management in the risk limitation management. Risklimitation model is divided into two aspects: one aspect is to model the total risklimitation, which uses replacement option method; The second aspect is to model theallocation of the total risk limitation, which uses the NAPM method.