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

The year of 2007 is the key one for our national life insurances to fight with great difficulty. In the interior, they need to open up the financing channel to prepare for coming into the market and accept the challenge from of the insurance experience and technology from the foreign life insurances in the exterior after five years we entered WTO. At the same time it is also a golden year and investment one-------the population dividend's arrival and public pension system reformation indicate the excellent period for commercial insurance; the anticipation of the stock's bull market and the expansion of the investment channel will bring more developing chances. But with the widening of the insurance market after WTO, the foreign insurances are taking more and more market share and bringing threat to our national insurances. Under such intense condition, the traditional insurance: the Chinese Life Insurance Company,Pacific Life Insurance Company and Xinhua Insurance Company are sent the supervision suggestions and given the explicit supervision measures, which has sounded the alarm to the Chinese insurance industry. So how to gain the equilibrium between the sufficient solvency and the enough marketing share, between opening the market and maintaining the development, between protecting the insured's interests and increasing the benefit of the insurance company as much as possible, between dissolving the cumulative risk of our insurance companies and improving their healthy development has became the urgent problem for our insurance companies. In this paper we analyze the direction and the details for insurance companies to maintain sufficient solvency.This paper has four chapters and the solvency of our insurance companies is discussed by the quantitative and qualitative analysis.In the first chapter we come up with the topic of the solvency from the condition of insufficient solvency of our insurance companies and the importance of solvency, introduce the history and present situation of solvency research and summarized the methods adopted by the researchers in and abroad including the theory method to decide the solvency margin and the experimental analysis using insurance company's data. This paper adopts the latter. The end of this chapter introduces the structure to let the reader acquaint with the thought of this paper.In the second chapter, we first introduce the concept of solvency that is, the solvency refers to the minimum standard that a company has good finance condition, e.g, the scale that the property surpasses the liability, give the mathematical expression of the solvency margin and then do some research on the factors that influence the solvency from the two aspects of the interior and exterior. Solvency is the 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. In the following 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 level, that is, to regulate the normal solvency through the following of the financial affairs and the supervision and control of the financial indexed 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 supervision in the world, the supervision authorities are inclined to the latter. At the end of the third chapter we process the models to determine the solvency margin that are used in each country on the basis of the acturial statistics of life insurance and then we sum up four methods to calculate the minimum solvency margin of a life insurance company aiming at the actual situation of our life insurance market ,namely, the ratio method,the risk theory method,the bankruptcy theory method and the comprehensive model. The ratio method We construct the relationship of the compensating paying ratio,cost ratio and the solvency margin according to the rule that the expenses are less than the revenue to exist for a life insurance company given that the paying ratio obeys some kind of distribution. The risk theory method pays attention to the short-term assembly risk. Suppose that the gross compensation quantity obeys some kind of distribution and is related to the compensating times and individual compensating quantity in a period and gain the necessary solvency margin for a life insurance company not to bankrupt. The bankruptcy method also proceeds from the risk theory but it selects longer time, it focuses on analyzing the insurer not to bankrupt at any time. The comprehensive model is fit for analyzing the degree and way of influence for all kinds of factors and the relative importance which is the optimal method to dispose the risk that the insurer faces now.The third chapter is the demonstration part. There are many indexes established by the nation to evaluate the solvency of a life insurance company. We choose the data of the insurance company that occupies a great share and use the factor analysis method to do some research on the variation of Chinese insurance companies'solvency and the cause of this variation according to the index regulation system and relative literatures used by IRIS, USA and the China Insurance Regulatory Commission. When selecting indexes, we select ten indexes to represent four aspects such as the capital sufficiency,profitability,stability and rate of the investment return and we emphasize the influence of the utilization of the capital on the solvency. Through computing the factor score, we divide the variation of the insurance company into four stages: the first one is from 1980 to 1990, the solvency fluctuates a little in this period. The second is from 1991 to 1998, the solvency drops suddenly .The asset worsens day after day, the reserve abstraction and return yield fluctuates much. But after 1996, the solvency waves because the asset and reserve are better. The third one is from 1998 to 2003, the solvency becomes to increase gradually. Though the asset is still very bad, the solvency in this period begin to for the enhancement of the regulation of reserve and the investment development of life insurance companies. But after 2003, the solvency decreases. In this period, the asset is worsen, the insufficiency of the solvency is still very serious because of the poor management and the intense competition though the rate of return.In the last chapter, we analyze the prominent problem of the present utilization of the capital of our insurance companies according to the demonstration results that is, the narrowness of the capital channel,the lowness of the insurance fund,the interest risk from the bank's interest,the uncertainty of the compensation capability,the immature market of stock market that hinder the operation of the fund,the defect of the time structure's mismatch and the unsatisfying of the organization with the development of the fund management and come up with the suggestions to increase the efficiency of the utilization of the fund. The first is to make use of the present policy to enter the market indirectly. The second is to explore the direct way to enter the market and reform the management way. The third is to try the combining investment. The fourth is to perfect the macro economic regulation and control and enhance the interior management. The last one is to set up the of professional organizations to manage the insurance company's asset.This paper evaluates the solvency of Chinese insurance industry, analyzes the reason of insufficiency of the solvency and provides the suggestions to improve it. It is the great pleasure if this paper can be of some help to provide the overall situation of the Chinese insurance industry to the regulation organization for better the regulation and to the insured for reasonable insuring.