Market Competition, Capital Regulation And The Financial Stability Of Life Insurance Companies

The insurance industry is the earliest and most open industry in Chinese financial system.Since the accession to the WTO in 2001,along with the reform and opening of the insurance market,Chinese insurance industry has experienced a process of increasing market players and intensifying competition.At the same time,along with the increase of business entities,the premium of Chinese insurance industry grows rapidly,with the average annual premium growth rate of the whole industry exceeding20%.However,the high premium growth requires huge capital support,and the result of the rough development without sustainability is that the company's earnings cannot satisfied the capital demand for market expansion,which has a negative impact on the financial stability of the company.Starting from 2018,Chinese insurance industry has accelerated into an more open stage,and the CBRC has approved a total of nearly one hundred foreign banks and foreign insurance companies to set up various types of institutions in China,which can be anticipated to put the market under greater competitive pressure in the future.In addition,the rapid development of the insurance industry has also many potential dangers.For example,in 2007,the regulator used the insurance guarantee fund to take over Xinhua Life for the first time;in 2009,the regulator injected $6 billion into the insurance guarantee fund of China United Insurance;in 2018,Anbang Insurance was taken over by the CBIRC;in July 2020,four insurance companies,including Tianan Property Insurance,were taken over by the CBIRC.As a special enterprise operating risks,the success or failure of insurance companies not only has a significant impact on themselves,but also has a significant relationship with countless policyholders.Once an insurance company collapses,it will certainly damage the interests of millions of policyholders and insured persons,and even affect the entire financial industry,triggering systemic risks.Obviously,as economic "shock absorber" and social "stabilizer",the stable financial status of an insurance company is not only a symbol of the company's successful operation,but also represents the effectiveness of the insurance company's monitoring and management ability of business risks.However,since 2020,the new pneumonia epidemic and the resulting economic turmoil have had a huge impact on the macro economy and finance,and lots of insurance companies around the world have adjusted their financial targets such as profit for 2020.So how can the insurance industry grow healthily and steadily in the "post-epidemic era" during the transformation? Market competition and capital regulation are the external mechanisms to stimulate and restrain the financial instability of insurance companies respectively,how does market competition affect the financial soundness of insurance companies? Can capital regulation effectively restrain the risky behavior of insurance companies and improve their financial stability?This paper answers the following four questions,taking life insurance companies as the subject of study.First,what's the theoretical mechanisms by which market competition and capital regulation affect the financial soundness of insurance companies?Second,how to measure the financial stability of insurance companies and construct the financial stability indicators of Chinese insurance companies based on the financial statement data at the micro level of companies?Third,the financial stability of insurance companies can be affected by internal management,external competition and regulatory factors.Therefore,how do the two external factors,market competition and capital regulation,affect the financial soundness of insurance companies? What are the channels through which market competition affects financial stability? How does market competition affect financial stability by influencing the liquidity creation of insurance companies? Do market competition and capital regulation affect together?Fourth,what should be done for insurance companies and regulators to improve the financial stability of companies and to prevent and mitigate the risk of financial instability of insurance companies?Based on the spatial competition model,we analyze how capital regulation and competition affect the market equilibrium actuarial assumption interest rate and the level of investment strategy preference of insurance companies through the competitive game in the underwriting market and the choice of investment strategy in the investment business,and then how they affect the financial stability of insurance companies.The study finds that in a very high barrier insurance market,government enhancement of competition policy raises the market equilibrium actuarial assumption interest rate,competition rises,insurers' net asset value decreases,financial stability decreases,and insolvency risk increases.When the capital regulation ratio is less than the optimal capital level,the insurance company will improve its own stability and reduce the probability of insolvency by taking moderate risks and increasing income.When the capital regulation ratio exceeds the optimal capital level,if the capital regulation requirement is further increased,the cost of holding more capital for insurance companies is too high,which will lead insurance companies to compensate by investing more in high-risk projects and taking excessive risks,which will result in a decline in their own financial sability and an increase in the risk of insolvency,and the negative utility of strict regulation becomes obvious.For these conclusions,numerical simulations are carried out in this paper.For the second issue,based on the Hollman-Hayes-Murrey(HHM)model,this paper designs indicators to measure the financial stability of China's insurance companies from two aspects: underwriting business and investment business,and conducts a predictive analysis of financial stability indicators according to the operating characteristics of China's insurance industry and financial statements.In addition,based on Benford's law theory,this paper also selects financial indicators of insurance companies from multiple perspectives,and constructs Benford factors based on financial indicators of profitability,solvency,growth,operating capacity and cash flow,from which the benford factors with predictive ability are selected as indicators of financial stability.The empirical study on the factors influencing financial stability finds that the financial stability of life insurance companies is affected by size,solvency,and operation model,and life insurance companies with smaller size,insufficient solvency,and more aggressive business model are more financially unstability.To address the third issue,this paper first empirically investigates the relationship between market competition and financial stability in terms of both underwriting and investment,and verifies which of the "competition-fragility" hypothesis and "competition-stability " hypothesis is valid,and conducts robustness tests.The study finds that the "competition-fragility" hypothesis is supported by market competition and financial stability,and the more intense the competition,the worse the financial stability of life insurance companies.Next,the analysis of the channels through which market competition affects financial stability shows that there is a significant mediating effect with the liquidity creation of insurers as a mediating variable.The more intense the competition is,the more financially robust it is if there is less liquidity creation on the liability side,and the less liquidity creation on the asset side,the less financially robust it is.Then,this paper empirically analyzes the effect of capital regulation on the financial stability of life insurance companies.It is found that,overall,the greater the regulatory pressure faced by life insurers,the worse the financial stability,but solvency regulation has a limited impact on the financial stability on the asset side.When considering the joint impact of market competition and capital regulation on the financial stability of life insurance companies,the empirical study finds that market competition and capital regulation interact and affect each other,jointly impacting financial stability.For the fourth question,combining the results of previous studies,this paper argues that the management of financial stability of life insurance companies should be carried out from several aspects.First,on the measure of financial stability of insurance companies,it can be considered not only from the risk but also from the business perspective,from the underwriting side and the asset side separately,and combined with financial innovations in the form of big data and blockchain to assess financial stability more effectively.Second,at the regulatory level,the financial stability of insurance companies in a competitive environment should be given high priority,and the impact of market competition on the financial stability of insurance companies should be fully considered in the context of deregulating foreign capital entry and reducing the market concentration in the insurance industry.Third,at the company level,insurance companies should reduce operational risks,improve financial stability at the asset side and underwriting side,and achieve stable operation by adjusting or changing business strategies and carrying out organizational reforms,etc.Compared with previous literature,the main innovation of this paper is three aspects.First,by constructing a theoretical model,capital regulation and competition are embedded in the optimization problem of insurance companies,and the mechanism of the impact of policy market competition and external regulation on the financial stability of insurance companies is studied.Second,financial stability indicators of insurance companies are constructed from multiple perspectives.At present,there are few studies dedicated to the financial stability of insurance companies.This paper fully considers the special characteristics of insurance companies' operation,and firstly,based on the HHM model,constructs a measure of financial instability from the perspective of underwriting business and investment business.Then,based on Benford's law,this paper constructs Benford factors and applies Benford's theory to the study of financial stability of insurance companies.Third,the impact of market competition,capital regulation and the joint effect of both on the financial stability of Chinese life insurance companies is empirically analyzed.In addition,this paper explores the mediating mechanism of market competition affecting financial stability from the perspective of liquidity creation.