A Study On The Solvency Of China's Life Insurance Company

The year of 2005 is an unusual one for our Chinese insurance companies because the insurance market will be fully open to the insurance companies with foreign capitals according to the rules of WTO. The share it can get and the capital gains it can earn in the intense competition drop a hint of the prospect of the company and influence the position of the company in people's minds. The law on the market determines that the insurance company with improper management, low benefit, small share of the market will be eliminated in this game, but it can restart to appear on the stage through the bankrupt reorganization, annexation and reorganization. The insurance is an important component of the financial system, which is so relative with the public's interests that it will show great effect on a nation's social stability, financial stability and even economic development. If the risk breaks out in insurance companies, the normal order of the national economy and the people's living will be interrupted. Consequently, how to gain the equilibrium between the industry security and regulation cost, between opening the market and saving the domestic insurance companies, between protecting the insured's interests and increasing the benefit of the insurance company as much as possible, and between dissolving the cumulative risk of our insurance companies and improving their healthy development under the existing situation has became the urgent problem that the insurance regulation department is facing. As the life insurance and non life insurance are different kinds, we mainly discuss the solvency regulation on life insurance companies in this paper. The paper has five chapters and the solvency regulation on our life insurance companies is discussed by the quantitative and qualitative analysis. In the first chapter we come up with the topic of the solvency regulation from the research of the development situation of domestic insurance market and the cases of foreign insurance companies'bankruptcy and then we argue the importance of the solvency regulation from two sides, that is, the contributions that life insurance has done to the national economy and its important position that is growing day by day in the national economy. The third section shows the basic structure of this paper so that the reader can acquaint with the thought of the author. In the second chapter, we first introduce the concept of solvency from the scale and the continuity of the finance strength of a company. The economic representation of an insurance company's solvency is the minus of the asset and the unsettled debt in the balance sheet in a certain period. From it we derive another three, that is, the actual solvency margin,the statutory solvency margin,the minimum solvency margin. In reality, the regulation department focuses on the relation between the statutory solvency margin and the actual solvency margin so that it can take measures to the companies unsatisfied with the legal margin. Given the mathematical description between them, we bring up the ideas to determine the minimum solvency margin and the statutory solvency margin. The second section we do some further research on the influence factors of the solvency of a life insurance company. Solvency is a plural function of the integral operation of the life insurance company which depends on a series of parameters such as the price of the products,the abstraction of the reserve,the arrangement of the reinsurance and the arrangement of investment etc., as well as the external environment such as the economic growth,the market interest,the inflation,the regulation,the tax revenue and the capital market. These risks occur from the 3—section profit and loss. In the third section we introduce the main regulation indexes that we use on the solvency regulation of life insurance companies so as to make further discussion about the thesis. The regulation on the life insurance company is divided into two levels, one is the ordinary lever, that is, to regulate the normal solvency through the following of the financial affairs and the supervision and control of the financial indexes qualitatively, the other is the regulation on the solvency margin, that is, to regulate the minimum solvency margin that each life insurance company has quantitatively. Seen from the development trend of the whole life insurance regulation in the world, the regulation authorities are inclined to the latter. In the third chapter we process the models to determine the solvency margin that are used in each country on the basis of the actuarialstatistics of life insurance and then we sum up three methods to calculate the minimum solvency margin of a life insurance company aiming at the actual situation of our life insurance market, namely, the short-term assembly risk model,the bankrupt theory method,the comprehensive model. We provide the theoretical means for the regulation department to determine the solvency margin from different aspects. These can be regarded as quantitative analysis on the solvency margin. The forth chapter is the demonstration part. There are so many indexes established by the nation to evaluate the solvency of a life insurance company that it is favorable to supervise the life insurance company qualitatively at normal times. If each index reaches the requirement in the financial statement submitted by the company, it is thought to have the solvency. However, as for the overall solvency change among the years and the comparison of solvency among each life insurance company in the same year, it is hard to explain because there is not necessary standard for insured to select the insurance company and not index assessment on solvency in the company rating. Accordingly, we refer to the index regulation system and relative literatures used by the IRIS of the USA and the China Insurance Regulatory Commission, take the availability of data into account and compare the solvency among five large-shared life insurance companies in Chinese insurance market by factor analysis method. In this paper we only introduce a kind of thought but in my opinion this method has a high use value on the insurance credit evaluation and the choice of the insurance company for the insured. When selecting indexes, we select eight indexes to represent four aspects such as the scale,the profitability,the capital structure and the reserve sufficiency. The data were obtained from the balance sheet and the income statement of five insurance companies from 1999~2002. In the last part, we put forward with six suggestions about the regulation on the insurance companies through the introduction of the two regulation manners in current world which are the weak regulation represented by the EU and the strong regulation represented by the USA and Canada and the comparison with our current solvency regulation on life insurance companies these years: First, borrow the advanced foreign regulation methods actively,...