| Life insurance has two particulars: the long-term nature of contracts and the saving element of contracts. It is because of the two particulars that life insurance companies' putting the technical reserves raised from the insurance premiums to long term investments and maldng profits is possible and necessary; also these two particulars makes life insurance companies 'investment different from other institutional investments. Life insurance has two basic functions: to insurance, or to compensate people for the loss of death or senility, and to finance (or to save). Trough the investment of life insurance companies the first function can not only be realized, but also be brought into full play. It is also the first function of compensation that makes life insurance companies 'investment different from other institutional investments. The structural changes of life insurance industry, such as the innovation of life insurance products, and the convergence of life insurance service and other financial services, which is the product of fiercer competition between life insurance industry and other financial intermediaries, have had a direct influence on life insurance companies' investment, and steered it in the direction of more profitable but higher-risk financial products. Their investment has changed from traditional high-stability instruments to more volatile financial instruments. In a general way a distinct shift has been observed in life insurance companies 'investment towards securities in general.Life insurance companies invest like an economic personality. Maximizing return is the object of life insurance companies 'companies, which also is the object of all investors. Theoretically, life insurance companies can choose any financial instrument, such as bonds, mortgages, stocks, futures, options, and etc. But because of the particulars and functions of life insurance, life insurance companies is more risk-averse than other investors. According to modem portfolio theory, through diversification, one can achieve minimum risk exposure for incrementally increasing levels of expected return. Modern portfolio theory can guide the asset allocation decision of life insurance companies. Nevertheless, its application must be limited for three reasons: (1) because of life insurer is a bundle of assets and liabilities, besides systematical risks and unsystematical risks in the capital market, life insurance companies undertake the Risk of Assets and Liabilities Unmatching; (2) life insurance companies must recognize its need for maintaining solvency, so the targeted return of the portfolio must be higher than the expected rate of life insurance products, or at least equal to it; (3)life insurer invest under the capital structure of its own country, or the life insurers' portfolio allocation is mostly subject to the internal capital market; (4)life insurance companies invest under regulation.Since the life insurer's portfolio allocation decision is complicated by the confounding nature of the product line mix, capital structure, and regulation, Life insurance companies 'optimal asset allocation will and must be constrained by three main restraints, they are the product line mix, or the liability, of life insurancecompanies, the capital structure of regional financial market, and the investment regulation. The objective return of optimal asset allocation must higher than the weighted average expected rate of life insurer's product line mix.According to the public benefit theory, because of market failure, the regulation of insurance industry is a must, its object is to protect the public benefits; According to the public choice theory, the regulation of insurance industry is the product of benefit groups' compromise; which is the case, but not all the case. As we all know, the regulation of insurance industry is more stringent than any other industry, which is related to the particulars of insurance, when people buy insurance products they pay premiums to insurance companies before the real cost...
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