Insurance Investment Theory

Insurance industry shows development cycle with the change of business environment. When the demand for the risk protection is greater than the capacity which insurers can offer, then it is a "hard market" and in this period, both investment return and underwriting income are resources of the profit for insurers. When the demand for the risk protection is smaller than the capacity which insurers can offer, then it is a "soft market" and in this period, insurers compete with each other by lowering the premium rates, which leads to underwriting losses, the investment return becomes the only source of profit. So insurance investment has become one of the core businesses of insurance industry. In developed countries, one of the major characteristics of insurance is that both underwriting (or liability business) and investment (or assets business) are equally important. Insurance companies have become financial services houses, which are not only just playing the function of indemnity and risk protection, but also capital financing. In one hand, investment has become the most important channel for the profit of insurance companies as well as the fatal factor for survive; in the other hand, insurance fund has become a major part of capital market.Since many years, Chinese insurance industry has been making profit by high tariff rates imposed under planned economic system, which prevents insurance investment from being valued and developing. As a result, either theory or practice of insurance investment is still in the infant stage. Chinese insurance market is now under the transition from highly regulated to deregulating. The demand for risk coverage has been suppressed by strict regulation and planned economic system in past decades, while the start of deregulation has created rapid increase of number of insurers in the market, resulting in sudden increase of capacity, which is much greater than risk protection demand. Under the situation, insurers are competing with each other by lowering the rates and increasing operation cost, which leads to shrinking of underwriting profit, even underwriting loss. So to guarantee the healthy development of Chinese insurance industry, it is a key factor to upgrade both theory and practice of Chinese insurance investment.This dissertation focuses on the analysis and study of insurance investment in China by following the resources, characteristics, nature and deployment of insurancefunds, the tools, technique and management of insurance investment. The proposals are made on how to upgrade insurance investment in China based on the above study. There are six chapters in this dissertation:Chapter One: "Resources, Characteristics and Movement Nature of Insurance Funds". This chapter starts from the very beginning of insurance investment -insurance funds, based on the study of various resources of the funds, four common natures are summarized, which are: "Reservation, Appreciation, Differentiation and Symmetrization", then the chapter further studies the different natures of different funds orienting from both non-life and life business. This chapter builds up the foundation of study on insurance investment.Chapter Two: "Principles, Scale and Structure of Insurance Investment". By combining the history of insurance investment and practice in China, this chapter studies the foundation of insurance investment - Four Principles: "Security, Appreciation, Liquidation and Matching Principles". Based on those four principles, by combining the nature of insurance funds with investment practice, it concludes that the grounds for choice of insurance investment must be the characteristics of funds and government supervision requirement. Then this chapter focuses on the study of two major choices of insurance investment: financial assets and tangible assets, the factors which are decisive for scale and structure of insurance investment, which include: financial soundness of insurers, structure of insurance portfolio, supervision requirement and other government regulations.Cha...