The Research On The Operational Risk Of The China's Life Insurance Industry

The problem of insolvency in the insurance industry is well recognized . This study investigates operational risks of China's life insurance industry and aims to study the possible financial crisis in China from a new perspective. The assets and credit of insurance company' may suffer because of the environmental change, poor management and fail decision etc. Some of life insurance company's bankruptcy in Japan and South Korea after Asian financial turmoil in 1997 has given warning to life insurance operation. Insurance is a part of the financial system and has a close tie with public benefits. Especially, life insurance industry has a strong externality to financial stability, social welfare and economic development. The exposure of risks in insurance industry will probably trigger severe financial crisis and then endanger the stability of whole society. So it's of great importance to assess the risk of China's life industry and illustrate the implications to operation and policy .On the basis of the literature review, we first identify that life insurance operation is risky in nature, which is determined by the characteristics of contract, the principle of operation and the market structure of life insurance. Usually, the risk will not break out because of long term of the contract, due to which the company tends to pursue expansion of business and neglect of the hidden risk. So regulation is required in insurance industry. The practices of other countries also proved that there is a close relationship between insurance solvency and the extent of regulation.Assessing and regulating the operational risks of life insurance begins with analyzing the company's financial report. This study investigates the regulatory information in the U.S.,EU and China and the financial tests ofinsurance credit rating companies. Financial ratios will give information about the company's capital adequacy, profitability, liquidity and management, which is an effective basis of assessing the solvency of the life insurance company. When studying the tendency of the solvency of China's life insurance operation, it's a practical method to select proper financial ratios according to the above references and adopt statistical analysis.The study selects 8 financial ratios with the data of China's main life insurance company and adopts factor analysis to illustrate the change of solvency of life insurance operation. The result shows that the general tendency of solvency is declining and the main factors influencing the solvency are capital capacity and profitability, earning asset and its liquidity, adequacy of reserves. Factor analysis also shows the change of solvency in different period and the determinants, which involve implications on how to improve the solvency. At present, the key to improve solvency is to reinforce the capital and increase profitability. At the same time, reducing expenses, enriching reserves, increasing the earning assets and cutting down fixed assets are also to be taken into consideration.On the basis of the above contents and conclusions, this study points out some macropolicy selections including removing limitation on capital raising, investment channels, alleviating tax and encouraging merger and acquisition. At the same time, life insurance needs strict regulation in China at preset stage.