A Study Of Enterprise Risk Management Based On Economic Capital Of Insurance Company In China

After China’s accession to WTO, as the first industry in the financial sector which open to foreign investors, insurance industry in China which has made remarkable of achievement in the entire industry’s growth and development directly face a great impact on management philosophy and methods come from foreign advanced insurance companies. Now, we are in the international financial environment of the aftermath of the financial crisis in the United States and European debt crisis ravaging the world. This situation provided an opportunity of eating a cutting wisdom to the Chinese insurance industry through study and observation. At the same time, it enables us to further recognize the importance of risk management, enhancing and improving risk management of insurance companies, especially the construction of an enterprise risk management system.In June2006, State-owned Assets Supervision and Administration Commission of the State Council (SASAC) issued the "Enterprise risk management guideline of Central enterprise" to guide Central Enterprises to carry out an enterprise risk management, enhance competiveness, increase the return on investment and promote Enterprises in a condition of sustainable, healthy and stable development. In April2007, the China Insurance Regulatory Commission(CIRC) issued "Risk Management Guidelines of Insurance Company (Trial edition)".The guidelines require the insurance company "should established a enterprise risk management System, which covers all aspects of business processes and operational processes, carries out continuous monitoring, regular assessment and accurate early warning of risk." In October2010, the CIRC issued "Implement Enterprise risk management Guidelines of life insurance companies". These guidelines require life insurance companies not only to set up a risk management committee and establish risk management information system no later than Octoberlst,2013, but also use the economic capital methods to measure exposure risk of the company which must be included in its annual enterprise risk management report from2014. We must establish an enterprise risk management system of insurance agency. It is also mentioned many times in "the twelfth five-year-plan of Chinese insurance industry", which is released in August2011.This paper is under such a background. When the concept of (comprehensive) Risk management is proposed first time, it has been emphasized by financial sectors. Many financial institutions, especially the large international banks, become the active practicers of risk management because of regulatory constraints. Meanwhile, capital requirements and risks faced by insures are combined by regulators, and it is a global trend. Enterprise risk management and business processes embedded with economic capital are both important which is newly attached to by rating agencies and regulators. Economic capital is not only a tool of risk measurement, but it is also a key role including many management tasks such as description, characterization, measurement, distribution, communication, adjustment etc., in an other words, it is a langrage of risk communication in the system of ERM.The further research of the application of the economic capital in enterprise risk management construction of insurance company has not been recognized. The guideline released by CIRC will promote the effort of the industry to develop the construction of ERM based on economic capital. Economic capital, however, is not only a metric method of required comprehensive risk reports, but also building the ERM system and culture by using economic capital. This study is hoping to make some contribution in this respect.Chapter I is the introduction of the dissertation. It presents the topic to be researched and the background for choosing the topic. Firstly, it analyses the importance of risk and risk management to insurance company. Then, it introduces the development history of the subject of risk management. The enterprise risk management is a new topic in this area. Thirdly, a brief explanation is given regarding the importance of economic capital enterprise risk management.Chapter II is the literature review, including risk management theory, enterprise risk management and economic capital. The reviews of risk management begin with the theory derived from the subject of risk management, which includes many risk characteristics research about different subjects. Then it summarizes the theory and implementation steps of traditional risk management. Enterprise risk management is introduced from the aspects of enterprise risk management motivation, the driving force, definition, theoretical framework, empirical evidence, and focuses on the insurance company’s enterprise risk management theory framework. The economic capital reviews are devoted to introduce the concept of economic, its development, the research of risk measurement and characteristics and comparison of various definitions of economic capital concepts. Second, it introduces some applied research of economic capital in risk measurement and risk allocation. Finally, it is the application of economic capital in insurance companies.The third chapter deals with how the insurance companies to build enterprise risk management framework. It studies the nine steps of enterprise risk management, works primarily through the process of insurance company enterprise risk management. It also discusses the implementation of an enterprise risk management structure. For further research of the application of economic capital, this chapter discusses the function of economic capital in enterprise risk management.The forth chapter is the relative knowledge about economic capital. It firstly presents the concept of economic capital. Then the mathematical methods of economic capital calculation are discussed from the points of scale and risk measurement. The relationship of economic capital and other risk measurements are compared from the aspects of consistence, correlation and applicability. Finally, it describes the relation of regulatory requirements and economic capital. The economic concept and calculation methods under different condition discussed here are the starting point for further application.In the fifth chapter, study is mainly focused on the application of economic capital in enterprise risk management. Economic capital plays a key role in many aspects, for instance risk measurement, risk integration, capital allocation, performance assessment, risk communication, corporate risk culture construction. How to use economic capital to risk measurement, risk integration, capital allocation and performance assessment is the core content in this chapter. For risk measurement, the characteristics of the insurance company are emphasized based on the discussion of the third chapter. The methods of how to obtain the decentralized effect is provided in the process of risk integration. Then we extend our discussion about the effects of decentralization from three levels. For capital allocation, further study is put to how to allocate capital rationally among the various business units using limited economic resources. For performance assessment, researches are put on how can service the enterprise’s business object to take risk and achieve profit with possible reasonable price. The four aspects of the application process of the economic capital are the fields with high skills.Chapter VI is case study. We put our study on China Pacific Insurance Group (CPIC) using the methods discussed in chapter five. We do research on risk measurement, risk integration, capital allocation, performance assessment in the processes of risk management using the concept of economic, and then give some advices to the other insurance companies of China.Chapter VII conclusion.The innovations of this paper are follows:The present studies of risk management of insurance company have no focus on economic capital to build a enterprise risk management. This paper is a useful attempt in this respect, providing complement and completes of risk management theory to our insurance company.We do further study on the application of economic capital in insurance company from the aspect of enterprise risk management system using various quantitative theories and tools. It can provide an example for China’s insurance company to build a enterprise risk management system.The concept and research methods discussed in this paper have some standardized characteristics. Because of its strong applicability and scalability, it breaks the traditional research in the economic capital limited to restrictions on life insurance or life insurance. Our study can be extended to a wider range of financial business groups and others.We develop a specific research methods based on GARCH(1,1) to calculate the economic capital, so that it can be used to measure the economic capital of market risk.