The Research On Economic Capital Forecasting Problem Of Life Insurance Companies

A perfect and reasonable risk management mechanism is the basis for the continued healthy operation of insurance companies,and it is also a prerequisite for insurance companies to make other business decisions.It has always been a hot issue both in the academic and business in establishing a risk management method,which can comprehensively reflect the unexpected risk and the internal risk values of insurance companies.Economic capital has been widely recognized by academics and practitioners as an insurance company's internal measure of unexpected risk,however,The economic capital that are more frequently studied in the theoretical and practical are the assessment of the magnitude of unexpected risks and the quantitative results of economic capital in the next period.In fact,the changing trends of the unexpected risks in future periods,and the risks after business adjustments,will have a fundamental impact on the continuing operations of insurance companies.Therefore,it is necessary to forecast the economic capital of insurers at different time points in the future by evaluating the trends of unexpected risks in future periods,and adjust the company's business structure and development strategy based on the forecast results.The economic capital forecasting is an advanced method to identify and manage the company's future risks,it has begun to receive the attention of the insurance industry.However,the research on the economic capital forecasting is still at an exploratory stage.There is no clear definition of economic capital forecasting,nor any form of economic capital forecasting theory.Insurance companies still have a blank in building and applying economic capital forecasting models.The forecasting of economic capital needs not only to consider the change of risk of the insurance company during a period of time,but also to consider the business structure,strategic planning,and asset liability management of this company during the same time.These goals often conflicting with each other represent the needs of different stakeholders.It can be said that the economic capital forecasting is a kind of risk management method that reflects the relationship between the company's risks and values after balancing the objectives of the stakeholders.This paper thoroughly studies the theoretical model and its application of the economic capital forecasting in insurance companies,discusses theoretically the significance of this method to all parties of insurance companies and constructs the framework of the economic capital forecasting for life insurance basis the characteristics of life insurance companies.By expressing the forecast of economic capital as risk factor,the economic capital forecasting has become a general model that includes the selection of risk factors and the assessment of the market value of asset and liability.The framework constructed in this paper has strong adaptability,allowing life insurance companies to select suitable risk models and numerical calculation methods for economic capital prediction based on their own characteristics,which provides a reference for China's insurance companies to implement this method.This paper is composed of seven chapters,which can be divided into three parts.The first part is theoretical research,which explains the definition and theoretical basis of economic capital forecasting,and combs and compares relevant achievements in this field at domestic and overseas.This part contains the first two chapters and the first three sections of the third chapter,which are the foundation of the subsequent chapters of this paper for the construction and application of economic capital forecasting model.The first chapter introduces the research background of this topic.The author believes that the economic capital forecasting is an advanced risk and capital management method that adapts to the complex background in domestic and overseas,which contains the frequent natural disasters in the international insurance industry,complex product design,intensified domestic insurance competition,Aging issues highlighted and tighter risk prevention.It is used internally by insurance companies for management unexpected risks,and create continuous value.The second chapter is a comprehensive review and summarization of the domestic and foreign literature on economic capital research.Based on the measurement and aggregation of risk,the quantification method of capital,and the optimal allocation and application of economic capital in the framework,this paper point out the insufficiency in the establishment,implementation,and application of economic capital forecasting models on previous studies.The first three sections of the third chapter give the definition and theoretical basis of economic capital forecasting.The author reviews the role of related theory in economic capital forecasting based on its purpose,modeling methods and implementation process.The author also believes that economic capital forecasting is not an isolated,single risk quantification technique,but a crossover theory,which integrates the economic capital quantification theory,the Enterprises-wise risk management theory,the Asset liability management theory,and the Probability and stochastic process theory.The second part is the construction and implementation of the model framework,which consists of the fourth and fifth chapters.Chapter four starts with the theoretical basis of economic capital forecasting and combines with the particularity of life insurance companies to construct a model framework for economic capital forecasting of life insurance companies.The framework,which is centered on the life insurance company's asset-liability economic value,expresses the forecast value of economic capital as a function of the company's risk factor,which helps the life insurance companies decompose the result of economic capital forecasting as three processes,namely the selection of risk factors,the assessment of asset liability Market consistent value and the forecasting of economic capital.Further,by selecting a set of common economic variables,and using it to model the changes of risks,the economic capital can then be represented by these economic variables,which is a theoretical foundation for the generation of scenarios in the implementation of economic capital forecasting model.Based on the characteristics of the theoretical model and the process of scenario generation,the author provides three numerical calculation methods for the life insurance company's economic capital forecasting model,namely the Stress testing,the Single-factor stochastic and the Multi-factor full stochastic.The five chapter is the implementation of the model framework.On the basis of the economic capital forecasting framework of life insurance companies,this paper analysis the process of the economic capital forecasting with the example of variable annuity products.In addition,based on the real data of China's insurance market,the author elaborates on the steps of economic capital forecasting,such as risk identification,risk model construction,economic scenario generation,and asset-liability market consistent value valuation,to illustrate the applicability of this model framework in the practice of insurance companies.The third part is the significance and application of economic capital forecasting,which corresponds to the fourth section of chapter three and the sixth chapters.The fourth section of chapter three discusses theoretically the significance of economic capital forecasting for insurance companies,regulatory agencies,and other external stakeholders.The author believes that the economic capital forecasting is of great significance in insurance companies' risk management,strategic planning,business line evaluation,supervision of risk quantification,reinsurance and rating agencies' understanding of risk management processes,and policyholder decision-making.For the insurance companies,the economic capital forecasting is an important tool to balance the multiple objectives and establish a corporate risk management culture.The six chapter,which bases on the model implementation process,aims to further explore the application of economic capital.This author believes that the process of parameter adjustment in the economic capital forecasting model is also of great significance to insurance companies.He discusses the application of economic capital forecasting from three perspectives,the sensitivity analysis of risk model,the dynamic monitoring and management of risk,and the product design and guidance for sales decision-making.The main innovations of this paper are as follows:Constructing the theoretical basis for forecasting the economic capital and applying this advanced risk management method to Chinese Insurance Companies.The issue of economic capital forecasting is a new research field in China's insurance industry.The existing research on this topic only analyzes some specific problems of the insurance company and does not form a complete theory.This paper starts from the definition of economic capital forecasting,gives a summarize of this problem and forms the theory of economic capital forecasting,makes the economic capital forecasting to be a complex system that includes the economic capital quantification theory,the Enterprises-wise risk management theory,the Asset-liability management theory,and the Probability and stochastic process theory.Building a framework for forecasting the economic capital of life insurance companies.Most of the existing research in China is limited to the quantification of economic capital,and is mostly confined to property and casualty insurance companies.However,research on economic capital forecasting is very scarce and there is a blank in the modeling of life insurance companies' economic capital forecasting.Based on the characteristics of asset-liability management,this paper builds a framework for forecasting economic capital of life insurance companies.This framework is general,which also includes the economic capital quantification model,and makes risk identification,measurement selection,risk measurement,risk aggregation,asset liability management,and economic capital model implementation as an organic entity.Providing methods for the implementation of life insurance company's economic capital forecasting model.The economic capital forecasting model is generally very complicated,and it is difficult to obtain directly through the model the predicted value of economic capital in practice.This paper proposes a method to approximate the forecast results of economic capital,and provides three kinds of operational numerical methods for the model framework,namely the Stress testing,the Single-factor stochastic and the Multi-factor full stochastic.The author also provides guidance for the implementation of economic capital forecasting of life insurance companies based on the characteristics of different numerical methodsExploring the application of economic capital forecasting.The role of economic capital forecasting for insurance companies is not limited to this aspect of risk management.This paper gives some more extensive applications of economic capital predicting from the aspects of theoretical and model implementation.The author points out the important role of economic capital forecasting in insurance companies' risk management,strategic planning,business line evaluation,product design and pricing,sensitivity analysis,etc.,which provides a reference for insurance companies to implement economic capital forecasting model.In addition,due to the limitations of data,knowledge structure and the author's research ability,this paper still has room for further improvement.One is giving a more depth study of the methods and steps of select economic variables when building the economic capital forecasting model.Another is studying study the simplified algorithm for the implementation of the insurance company's economic capital forecasting model.