Study On Enterprise-wise Risk Management Of Property And Casualty Insurance Company Based On Economic Capital

As special financial institutions, the insurance companies are not only to undertake and transfer the risk of the insurants, but also pay the close attention to the reconcilement and precaution of the internal risk. Due to the undulatory property of P&C insurance risk, how to manage them has always been concerned for the insurers.With the tide economic globalization and frequent financial crisis, new risk management thoughts and techniques are applied to more complex economic environment than ever before."Enterprise-wide risk management"was introduced then. The other trend is that economic capital (EC) management is being the key job of the financial enterprise risk management. It is the capital that incarnates the ability of insurance company to expand the business, and finally determines the possibility of insurance company of surviving and thriving in the market.The thesis tries to apply the thought mentioned above to the risk evaluation and management in P&C insurance company, and presents an ERM frame which is based on economic capital management method. The quantitative evaluation of risk is emphatically analyzed and EC is allocated rationally on the guidance of ERM frame.The article is organized as follow:First, presenting concerned concept of risk, the popular risk measures such as Value-at-Risk and something other derived are discussed and also the comparison is given. The Tail conditional Expectation (TCE) is picked up as normal risk measurement technique in the view of coherent standard of risk measurement. With the whole process of ERM being described from the viewpoint of system theory, this part can make an overall view of a modern risk—ERM. By comparing of traditional risk & modern risk, deficiencies can be found out which don't satisfy with modern economic environment. It is argued that ERM is the direction of risk management.Second, necessity and feasibility of risk management for P&C insurance companies is analyzed. An overall explanation of the P&C enterprise risk management procedure which include a step of evaluation of single risk. The underwriting risk, which account for the largest proportion is divided into Catastrophe &un-catastrophe risk, for which two different risk evaluation model are put forward. Capital management that is ERM internal model is proposed as risk management strategy for its critical role.Third, economic capital is defined, and the core approach of economic capital allocation is discussed, namely RAROC. Based on the case study of PICC, an allocation for economic capital between kinds of business units with RAROC is described. However, the traditional RAROC based on VaR measure can not meet the requirement of coherent standard of risk measurement, and a modified allocation approach is introduced to judge the risk condition of the enterprise through the estimated economic capital with TCE.Finally, a simplified method of TCE calculation is given under assumption of normal distribution. According to discussion above, an empirical study of economic capital management in P&C insurance business in China is given which includes six P&C insurance companies as sample. Some policy proposals to adopt the economic capital management in the P&C insurance company in China are put forward in the end.