Study On The Efficiency Of Chinese Life Insurance Industry

Since the domestic insurance business restarted in 1980, the life insurance industry in China has grown rapidly, and the growth rate of insurance premium has got up to nearly 30%. As an emerging insurance market of developing countries, China's insurance industry has become the focus of attention all over the world. Firstly, the insurance industry paid about 900 billion yuan worth of insurance benefits from 2003 to 2008, which contributed a great deal to the stability of the national economy. Secondly, the insurance industry has played an important role in multi-level social security system, and accrued 1.9 trillion yuan as reserves for retirement and medical benefits. Thirdly, the insurance companies have been the second institutional investors in the bond market and the important institutional investors in the stock market. As strategic or financial investors, insurance companies supported the reform of commercial banks by improving the financial strength of banks. Fourthly, the insurance market system and organization system have been improved greatly. Domestic life insurance companies and their foreign counterparts exist and compete in the same market.Although the life insurance industry in China has developed rapidly in the past three decades, the operations of life insurance companies are facing a lot of challenges. One is the hot competitions. With the rapid emergence and continuing evolution of a global economy, any country that intends to play an important role in world trade must ultimately remove the protection and restrictions on its insurance market. Specifically, under the rules of the World Trade Organization (WTO) agreements regarding liberalization in financial service industries. Domestic insurance companies face competitions among themselves and from foreign entrants. Although the market share of foreign companies is still limited, its influence on the local market and the public is remarkable. The other is the need of restructing the insurance industry. The operation model of the insurance industry, especially the life insurance industry is characterized by extensive cultivation, which means that the insurance companies pay more attention to total premium amount, development speed and market share rather than the development quality. As a result, the insurance market in China expresses homogeneity of products and lack of innovation in products, services, management and technology. Furthermore, the performance of overall life insurance industry of China is unsatisfactory. The cash surrender value in 2008 was 97 billion yuan, which accounted for 10% of the total premium. The profit margin of all life insurance companies is less than 1%, and most of the companies are still losing money. The third is external shock. The economic crisis resulting from US secondary loan crisis brought negative impact on Chinese macro-economy. Life insurance industry of China is young, and the ability of risk bearing is low. So the life insurance companies must enhance risk-proof, transfer operation model, keep the business stable, and improve the performance.In order to deal with the hot competitions, accomplish the restructure process, and release the impact of external shock, life insurance companies must change their operation model and improve the competitiveness. The key of core competitiveness is efficiency improvement. In the market economy, one of the essential rules is that only the competent ones can survive and those incompetent ones are bount to eliminate through selection. Only the company that continues to strengthen its ability of cost control and profit creation can win in the market economy. From the macro-economy viewpoint, the insurance industry is the an important part of financial services industry and resource allocation, so the efficiency promotion of the insurance industry is important to the change of economic growth model and optimization of economic structure.Taking the above issues into consideration, the author chooses to work on this topic—"Study on the efficiency of the Chinese life insurance industry". After theoretically explaining the institutional evolution and specific rule of the life insurance operation, the author analyzes the issues and contradictions in the life insurance industry of China, calculates the efficiency scores of all life insurance companies using financial indices method and data envelopment analysis (DEA) method so as to provide ways of enhancing the life insurance firms'performance.The most distinct feature of the paper is combining the empirical analysis with the theoretical study. The empirical study becomes the main method to analyze economy in modern economics. Admittedly, the empirical study is more persuasive, because it emphasizes facts. In fact, the empirical study can help to shake off disturbing of personal emotion and subjective wishes and be propitious to depict major characters in mathematics and modeling of economics which emphasize drawing conclusions by precise computing. The previous researchers do more for the qualitative analysis and emphasize literal narration when discussing the efficiency of Chinese life insurance industry, so the author adds more quantitative analysis in this paper, to describe the subject with more detailed data and introduce statistics and econometrics to calculate and validate. The author took a lot of time to collect data for this paper. In order to draw a comparatively impersonal conclusion, the author calculated repeatedly when processing data. This paper is not to simply reiterate the old viewpoints or make conclusions by market perception, but to get a general conclusion on the basis of collecting data, classifying the samples according to different standards, and building up models. Although the difference exists between the conclusion and reality, the paper tries to show us the trend and situation of the efficiency of the Chinese life insurance industry.The paper consists of the following eight chapters:Chapter 1:Introduction. It provides the general picture of this paper including background and significance of the theme, overseas and domestic literature review on the study of the efficiency of insurance institution, research emphasis, empirical methods, detailed outline and framework.Chapter 2:The life insurance industry in China. This chapter provides a comprehensive overview of the Chinese life insurance industry. Firstly it examines the deep impact of Chinese economic reform during the past three decades whose characters are economic transition, market opening and gradual reform on the development of the life insurance industry. Its purpose is to gain a deeper understanding of insurers'operations in terms of their production and investment performance. It explains the unique characteristics of insurers to justify the selection of input and output variables necessary in constructing accurate insurance models. It also reports the current trends and development, along with the industry's restructuring process as it pertains to the Chinese life insurance market.Chapter 3:Theory and measurement methodology of insurance firms' efficiency. It summarizes the efficiency ideas and theories of western economies, examines the logic basis and theoretical framework of efficiency analysis, and defines the various efficiencies of life insurance firms. Then this chapter explains the three principal types of efficiency estimation methodologies:financial ratios, parametric approach, and nonparametric (mathematical-programming) approach. Ratio analysis is a relatively simple tool in assessing the financial condition of a firm. Rations are somewhat proficient indicators of direction and change patterns, however, they give a one-dimensional incomplete indication of performance. While frontier analysis techniques provide more comprehensive and reliable information, and sources and magnitude of inefficiency can be determined that may ultimately lead to reduction in cost of operations or an increase in the services provided without expending additional resources. Malmquist index analysis which is used to analyze the productivity and efficiency changes overtime is explained at last.Chapter 4:On life insurance companies'efficiency:application of financial ratios and factor analysis method. This chapter applies one of the multi-analysis methods—factor analysis method to life insurance companies'efficiency and performance estimates, which can overcome the problems of setting weights in advance. We select 34 life insurance companies which are operating in China in 2007 as samples and 17 financial ratios as indexes (including total asset, premium income, market share, operating expense ratio, asset groth rate, investment rate, total capital, investment return and so on), and evaluate the risk status and overall efficiency of the sample companies.Chapter 5:Empirical study on efficiency of the Chinese life Insurance industry:data envelopment analysis application. It uses a nonparametric frontier approach DEA to calculate efficiency scores of all Chinese life insurance companies from 1998 to 2007 and Malmquist productivity indices to examine productivity changes before and after entering WTO. The paper constructs a single grand frontier to compare the efficiency change before and after entering WTO and between the different types of ownership (old domestic, foreign, and new local life insurers). Our results are summarized as follows. First, both the DEA and Malmquist results show that old domestic firms have been slightly impacted by the new competitors around 1998-2007. However the existing firms cope with new challenges well. Specifically, the Malmquist cumulative results show the increasing trend from 2002 to 2007. The old domestic firms'frontier dominates new firms'frontier for producing their output in terms of technology, scale, allocation, and cost efficiency. The overall performance of Chinese life insurance industry is improving gradually.Chapter 6:The analysis of influencing factors of the efficiency of the Chinese life insurance industry. This chapter employs Tobit regression analysis to investigate the relationship between various firms characteristics and efficiency measures. The technical efficiency, pure technical efficiency, scale efficiency, allocation efficiency and cost efficiency which are estimated in the previous chapter are used separately as dependent variables. Various independent variables are included in the regression to control for the effect of a variety of firms characteristics. The independent variables include:business size, ownership type dummy, organization structure, distribution system, product mix, human resource, operating expense ratio, investment portfolio, and leverage ratio.Chapter 7:The ways to promote the efficiency of the Chinese life insurance industry. It provides some measures to promote the efficiency of the Chinese life insurance industry. They are:(1)changing operation ideas and patterns from pursuing quantity to improving quality; (2) perfecting ownership structure and corporate governance; (3) starting up organization framework and business process restructure of life insurance firms; (4) enforcing the information technology construction of life insurance firms.Chapter 8:Conclusions and direction of further research. The last chapter is the conclusions which conclude the main points of the paper and prospects the problems to be researched in the future.This paper has some contributions in the following aspects:To begin with, it summarizes the unique operating mechanism of the life insurance industry, such as the longer profit-making cycle, the higher liability level, the bigger uncertainty in estimating future profits, the serious information asymmetry between the insurers and insureds, the inclusion of embedded options in the products and the higher capital investment. All these characteristics calls for better efficiency analysis methods; on the other hand, they form the foundation for the in-depth explanation of the results of empirical analyses.Secondly, this paper applies the factor analysis to estimate life insurance companies'efficiency by appealing to financial indicators. It evaluates life insurance companies'efficiency by taking advantage of various index systems such as those that can indicate the size, solvency and profitability of life insurance companies. By combining this method with the existing off-site supervision systems, the supervising and administrating agency can estimate the solvency and overall operation of life insurance companies so that the disadvantage of the original method such as the overuse of qualitative indices and the setting weights subjectively will be offset.Thirdly, using DEA method, this paper measures and calculates the technical efficiencies, pure technical efficiencies and scale efficiencies of 182 sample life insurance companies, which existed in China from 1998 to 2007. In addition, it introduces the prices of input factors into the calculation of the allocation efficiencies and cost efficiencies of the sample companies. Larger sample intervals, more sample companies and higher reasonability in selecting input and output variables contribute to the success of this method. To ensure the preciseness and reliability of the results, the author uses three different test methods to determine whether separate frontier or pooled frontier should be applied to various groups of life insurance firms:analysis of variance, two-sample Wilcoxon test and Kolmogorov-Smirnov test. In this way, the disadvantage of the EDA method that it depends too much on data is somewhat offset and the results of empirical analyses become more reliable and dependable.