Application Of VaR To Measure Risk Based Capital Of China P&C Insurance Companies

With the rapid growth of the insurance industry, the operating risk of the P&C insurance companies becomes much stronger. The insurance regulator should introduce the concept of Risk-based Capital (RBC) to supervise insurers. So the purpose of this thesis is to estimate the risk coefficients for each related asset of insurers based on Value at Risk (VaR) methods and then to apply the estimated risk coefficients to calculate the risk capital of the PICC P&C Co., Ltd. The meaning of this thesis is to provide some applicable theoretical foundation to construct primary framework of RBC in China.The thesis firstly sets up VaR model parameters and selects suitable models in terms of property of P&C Insurance companies: it supposes that the holding period of assets is one year and the confidence level is 95%, and at the same time comparing various kinds of VaR methods, it plans to estimate the risk coefficients using Delta-EWMA approach and historical simulation approach. Secondly, it projects the formula of asset risk coefficients by VaR and selects typical asset returns index. Thirdly, the thesis inspects two approaches that are used in accounting asset risk coefficients through back testing (Kupiec test and autocorrelation test). The result proves that the model based on Delta-EWMA is legitimacy. Subsequently it makes an empirical analysis on the asset risk capital: at first, it estimates the asset risk coefficients from 2004 to 2006 by Delta-EWMA approach. The empirical evidences indicate that coefficients of fixed income investment are less than stock, fund and monetary market investment. Then the thesis tests the stability of the estimated risk coefficients. The empirical evidences show that the estimated risk coefficients are stable in two or three years. Finally, it calculates asset risk capital of PICC P&C Co., Ltd from 2004 to 2006. The result shows that stock is the most risky, followed by monetary market investment and fund. So PICC P&C Co., Ltd should keep sufficient capital alert against risk.