Study On The Equilibrium Of The Competition Of Insurance Market Entities

The focus of the problem of competition equilibrium of insurance market entities is on how insurance market affect the decision of the insurance companies and how the interact of the insurance companies form the structure of the insurance market,with the background of the deepening of the reform on market competition.In general,the insurance market entities include non-life insurance companies,life insurance companies,reinsurance companies,etc.However,with more focus on the insurance protection,the difference between risk sharing insurance products and payback insurance products receives attention.The risk sharing insurance products,such as motor insurance,property insurance,term life insurance and long term care insurance,pay on the occur of insurance accidents,so the operation of them focuses on the relationship between accident cost and insurance pricing.The operation of payback insurance,such as endowment insurance and annuities,focuses on the relationship between the insurance market and capital market.With focus on the operation of risk sharing insurance products and through research on the market structure of non-life insurance market and the game between non-life insurance companies,the paper studies on the game between insurance companies operating risk sharing insurance products.Therefore,the thesis focuses on the macro structure of the insurance market and on the micro decision of the insurance companies.In the framework of the market competition,the entities in the insurance market has formed an organic entity and shape the development of the insurance market.At the same time,the influence is bilateral in the since that the development of the insurance market will impact the decision of the insurance companies.Equity capital is rushing into the insurance market with fierce competition,and the management team of the insurance companies,as representation of the shareholders' benefits are making decisions on the operation of the insurance companies and form the ever changing insurance market.The thesis endeavors to research in depth on the competition of the insurance companies and construct the model that describe the competition and the game of insurance companies.In the iteration of the computation of the game model,the insurance companies are reaching the optimal decisions regarding the key variables and hence form the equilibrium of the insurance market.In the situation,no insurance company has the incentive to deviate from the current decision given the decision of other insurance companies.Among the decision variables,the most important one is the premium of the insurance policies.The pricing strategy of the insurance companies directly impact on the competitive advantage of the policies among the insurance product provided by the insurance companies and thus impact on the market share of the company.At the same time the premium of the products will influence the profit level of every single policy and thus the profit and solvency level of the insurance company.Therefore,the premium of the insurance policies is the direct variable that the insurance companies choose in their competition and thus the focus of the thesis.Although in the pricing process the insurance company could determine the premium by adding a proportion of profit to the risk premium,the proportion of profit is not fixed,but changes with the structure of the insurance market.When there is only one insurance company in the insurance market,the insurer becomes the monopoly and will decide the premium based on the demand curve of the consumers.But when there is multiple insurers in the market,the method of pricing will change and the thesis will research into the method of pricing.The structure of the insurance market does not only affect the insurers' decisions through the number of insurers in the insurance market,but in a wholistic way,with respect to the market barrier,the regulation,the scale effect and the scope effect.Thus,the thesis will focus on the property-liability insurance market and analyze the market structure to discover how the insurance market will affect the decision of the insurers.Since the insurance market is an organic entity,the insurers will not only be affected by the market structure but also affect the market structure.Therefore,the thesis will study the micro decision of the insurance companies and how the micro decisions will shape the macro development of the insurance market,with focus on the insurance underwriting cycle.The underwriting cycle is more apparent in the property-liability insurance market,with the volatility of the combined ratio as the indicator of the existence of the cycle.There is wide evidence on the underwriting cycle from the researches done in different countries,and there are many explanations behind the phenomenon.The result of the calculation of the model reveals the existence of the insurance cycle.The thesis proposes that the insurance cycle results from the competition of the insurers: when the competition is fierce,the premium of the insurers is low,leading to the inefficiency of the profit and capital level;upon the inefficiency,the insurers adopt a more moderate competition strategy and the premium will go up and the profit level of the industry will be enhanced.In the process,the level of competition among the insurers is determined by capital accumulated affected by the pricing strategy and the random insurance payout.To explore the decisions of the insurance companies in depth,the thesis look into the market structure of the market and construct the game model of the competition between the insurers.In the analysis,the framework of the research is built upon the theory of industrial organization which mainly researches on the competition of the companies and the overall market,including but not restricted to the market structure such as the level of monopoly,the market barrier,etc and the decisions of the companies under the specific market structure,including the pricing policy,product quality,the organizational structure of the company,etc.At the same time,the background of the research is the strengthening level of the market competition with the issue of the relevant government policies: in 2013,the Third Plenary Session of Eighteenth Central Committee emphasized on the decisive role of the market in the allocation of resources;in 2014,the state council points out the importance of the marketoriented reform in the insurance industry.Under this background,the study on the competition equilibrium of the insurance companies has its theoretical and contemporary contributions.Based on the research logic and the background,the organization of the chapters is as follows:Chapter One is on the competition situation of the Chinese insurance market.The decision of the insurance companies not only depends on the situation of the company itself,but also on the whole market.The market structure of the insurance market plays an important role on the decision of the insurers.Michael Porter,in his famous book “Competition Strategy”,figures out the importance of the market structure.Chapter One analyzes the characteristics of the insurance market,from the aspect of the level of market concentration,market competition and market barrier,and discusses the effect on insurance companies.Furthermore,Chapter One quantitatively analyzed the scale and scope effect of the insurance market,with the premium income and the insurance claim as the output of the insurance company and reached the conclusion that when measuring insurance claim as the output there is no scale effect among the medium and large insurance companies but the small insurers have scale effect;when measuring the insurance claim as the output,there is scale effect among the insurers.The qualitative and quantitative analysis on the insurance market has built up the foundation for the relevant calculation in the game model of the insurers.Chapter Two constructed the equilibrium model of the competition of insurance companies in a single period,and reached the conclusion that the profit-maximizing insurance companies will price the insurance policy at a level higher than the risk premium.Take into considerations that in Chinese property-liability insurance market,there are insurers pursuing for the maximization of the scale of the premium.The chapter further constructs the model and finds out that the insurers will price at the lowest level permitted by the regulation or the solvency level and they will become bankrupt.When the profit-maximizing company and the scale-maximizing company compete together,the scale-maximizing company earns large market share with low price,but will become insolvent,while the profit-maximizing insurers have abundant solvency level.Chapter Three constructs the dynamic game model of the competition between insurers and verifies the existence of the underwriting cycle with the result of the model.The dynamic game model consists of ten insurance companies and the total period of competition is 25 periods.Chapter Three analyzes the process of the development of the insurance market in depth,with the parameters set according to the Chinese property-liability insurance market,including the market share and the expense rate.The main conclusion is that the larger insurance companies adopt a higher premium,which fits their goal of profit maximization and avoids the price war in the market and enhances the overall profit level in the insurance market.As the game goes on,the market share of the insurance companies are becoming more equal,which coincidence with the result that there is no scale effect among the large and medium insurers.Chapter Three continues to simulate the game 1000 times and obtained the underwriting cycle of the insurance market,adding one explanation to the existence of the underwriting cycle.For each simulation,AR(2)model is used to test the underwriting cycle and there are 762 simulations that exhibit the existence of the underwriting cycle and the distribution of the length of the cycle has most frequency around 7 and 8.Chapter Four researches into the game model of insurers with consideration of investment rate and premium scale.The equilibrium price of the insurers decreases as the investment rate increases and the same relationship applies to the equilibrium price and the coefficient of the premium scale in the objective function.Under certain setting of parameters,we obtain the equilibrium price that fits the actual pricing status of the Chinese propertyliability insurance market,thus providing a theoretical explanation for the status of the insurance market.Chapter Five further analyzes the effect of the operation strategy of the insurers on the profit level of the insurer.First,the chapter qualitatively analyzes the effect and deems that in order to improve the profit level,the insurer could reduce the expense rate,the claim cost,lapse rate and stabilize the claim distribution and improve the investment rate.There are interactions between the operating strategies.Next,the chapter quantitatively analyzes the change of the profit level with respect to the change of single operating strategy.With the model considering investment rate,we can obtain the following conclusions: every percentage decrease of the expense rate will lead to the increase of profit of 4.1 percent;every 5 percent decrease of the claim cost,the profit will increase 43 percent;every percentage decrease of the lapse rate will lead to the increase of profit of 2.7 percent;every percentage increase of investment rate will lead to the decrease of profit of 2.8 percent;distribution of claim cost distribution has no influence on the profit of the insurer.The quantitave conclusion could support the insurers' decision of the operating strategies.