Study Of Economic Capital Management Based On Chinese Insurance Companies

At present, China's insurance industry is still in pursuit of the premium inextensive pattern. When insurance companies expand their scale, they have neglectedbusiness risk control. Insurance solvency is still the core of the industry regulation.And the risks of different insurance companies is less concerned, not to mention aboutthe individualized regulatory for every insurance company. With the development ofthe insurance market and a new generation solvency regulatory system, businesspattern of pure pursuit of market share is unaccommodated to meet insurancecompany's ongoing development requirements. Insurance companies will turn toeconomic capital management focusing on managing risk and return. Regulators arealso actively exploring the implementation of more comprehensive and reasonableinsurance regulatory measures.Economic capital management is one kind of capital management practicesincluding risk loss and profit, which is the core part of risk management. Byinternalizing risk, economic capital management is changing the original way ofcapital application and extending it to all aspects of corporate governance. Economiccapital management provides a new analytical framework and regulatory perspective,not only to meet risk management requirements of insurance companies, but also toprovide a theoretical and methodological reference for new surveillance methods.Existing economic capital management researches lack of theoretical and empiricalanalysis in insurance companies. Based on a review of the existing enterprise riskmanagement theories, this paper takes the insurance company's economic capitalmanagement as research object, and proposes the establishment of the insurancecompany's economic capital management system in the reference with COSO-ERManalysis framework. The empirical study with risk management practices in domesticand international insurance industry involves company and regulatory perspective toexplore the significance of the economic capital management. This paper includes thefollowing aspects:First, this paper establishes a comprehensive risk management analysisframework based on economic capital, focusing on the central role of economiccapital in the framework, integrating several aspects such as COSO risk managementelements and performance of the insurance company to verify that economic capital isnot just a tool in the overall risk management, but the central pillar of comprehensiverisk management. It plays a very important role in the following three aspects. Economic capital is the direct tool to measures risk and return and to achieve acomprehensive risk management strategy. Economic capital is the basis for theimplementation of risk limit management. Economic capital is the basic tools tostrengthen staff concept of enterprise risk management to ensure effectiveness of riskmanagement assessment. By risk identification, measurement methods selection andrational allocation of risk capacity or limits, economic capital management can playthe role of risk management.Second, this paper calculates insurance company's economic capital from twoperspectives. On company's overall level, TailVaR risk quantification method is usedto calculated China's life insurance and non-life insurance company's economiccapital concerning overall risk changes, which meets consistent risk measurementprinciples. On business sector level, copula functions are used to aggregate economiccapital from different business sectors, concerning the risk of each business unit.When fitting marginal distribution of loss, gamma distribution and extreme valuetheory can be better fit the data loss and show fat tail loss distribution.Third, this paper studies economic capital allocation on insurance company level.It indicates the distinction between stock economic capital allocation and incrementaleconomic capital allocation. Stock economic capital covers the loss, whileincremental method is used to secondary allocate excess economic capital in variousbusiness units, which illustrates business development orientation. Then this papersummarizes various economic capital allocation methods in categories and proposesan unified framework to understand various allocation methods based on optimization.The constraints variation leads to different capital allocation model, which betterillustrates the intrinsic relationship between different allocation models. Companymanagers can select from a variety of allocation models according to points of focusin different periods, and find more economic capital allocation models throughchanging constraints.Fourth, this paper analyzes the role of economic capital management in insuranceregulation. It makes causality analysis between economic capital management andeconomic growth or cyclical fluctuations with the data on China's insurance industry.Granger causality test results point out that cyclical fluctuations cause economiccapital changes, and the change of economic capital can influence economy.Moreover, the relation between cyclical fluctuations and economic capital changeshas also been confirmed. By incorporating economic capital into IS-LM model, economic capital can impact macroeconomic policies. The paper also establishes amodel containing economic capital management and external financing to deal withinsolvency. There are alternative and complementary effects between economiccapital management and external financing in dealing with insolvency problem.Regulators should make full use of its internal relations, prompting beneficialeconomic capital management behavior for solvency and risk management.Finally, this paper proposes targeted suggestions based on relevant empiricalresearch results and application of economic capital in insurance companies.Insurance companies should focus on training comprehensive risk managementculture and philosophy, continue to improve personnel and organization building,accelerate the construction of information systems, develop more accurate risk model,make full use of the stock economic capital and incremental economic capital,establish incentive and restrictive mechanism and performance appraisal systems.China's insurance companies have come to realize the validity and importance ofeconomic capital management, and some insurance companies have begun toimplement economic capital management. However, due to various limit, the practicalapplication of economic capital in insurance industry is still in its infancy. China'sinsurance companies need to improve economic capital management systemcombining market environment and industry development, and consider problems ofrisk quantification and economic capital application brought by business innovation.With the insurance industry statistics accumulation, more indicators and data methodscan be tried to comprehensively analyze the economic capital application in businesslines, which provides a reference for the insured, companies managers, and regulatoryagencies.