The Empirical Analysis On Self-discipline Effect Of China's Property Insurance Companies' Franchise Value

Insurance is to operate risks, however, insurance company is also faced with a variety of risks in the process of business. In 2008, the U.S. sub-prime mortgage crisis triggered the global financial markets, the insurance industry as a part of the integral financial chain, inevitably experienced a huge shock. The world's largest insurance company American International Group AIG was forced to reshuffle a number of high quality businesses to raise needed funds. Ping An's investment to Fortis lead to large losses. July 15,2008, on the National Working Conference of Insurance Supervisors, the Chairman of the China Insurance Regulatory Commission Chairman disclosed that there are 12 insurance companies in different degrees of risk of insolvency, some of which are in a serious shortage of solvency, for the first time. Those indicate the importance of risk control and risk prevention. Risk control and risk prevention are the key of the insurance supervision and the operation of the company. Stronger the ability of controlling risks, the better of the businesses development.At present, many scholars have done a systematic analysis of risk in the view of the regulatory and the company and put forward corresponding countermeasures. This paper argues that the key to control and prevent the risk of insurance companies is to analyze the insurance company's own internal risk-taking incentives. Franchise value is the one of the important aspects of internal motivation. Many studies have shown that franchise value has the effect of restraining moral hazard and risk-tanking motivation. The research is mature in banking and form a "banking franchise value paradigm", which means the franchise value of bank can reduce the moral hazard, and it is the procedures of self-discipline. For the insurance industry, there is a examination and approval system, which has strict barriers to entry, operational restrictions, the responsibility of reserve requirements and minimum solvency requirements. There exists franchise value in insurance industry. This paper mainly analyzes the self-discipline of insurance franchise value based on the research methods of banking.The main content of this paper is divided into five chapters. The Chapter 1 is an overview of the main research results on banking and insurance franchise value. The Chapter 2, analyzes the resource of insurance franchise value briefly. The franchise value is related to operation performance of the company, which called "resources of company operating performance-related", and it is also has relationship with the insurance market, which called "resource of market-related". The Chapter 3 from the financial constraints and endogenous theory, theoretical analysis the basis for the self-discipline effect of franchise value from theory of financial restraint and inherent incentive supervision. Then construct three models to explain the effect. Franchise value reflects the company's bankruptcy cost, when the insurance company's franchise value is large, the insurance company will tend to operate caution and reduce the risk, in order to continue to get the values. On the contrary, if the franchise value is smaller than operating costs, the companies run the risk under the condition of being "delisted". If failure, in is a smaller loss of franchise value, if successful, will receive greater benefits. The size of franchise value affects the selection of risk-taking. The last section of Chapter 3 discusses the essence of franchise value, which is to restrain moral hazard. Asymmetric information, the option value of debt and insurance protection fund system induced moral hazard arid caused inefficiency of market failure and regulatory failure. Franchise value as a self-regulatory mechanism within the insurance companies curb moral hazard of insurance companies.In the Chapter 4, the paper focused on the empirical analysis through constructing a panel data model of 11 property and casualty insurance companies from 2001 to 2007. The results show that the franchise value has a disciplining effect in our country and insurance protection fund weaken the effectiveness, the effectiveness of encouraging risk more than the control of franchise value.The Chapter 5, the paper makes some proposals from the point of company and regulator and point out the inadequacies of the paper and the future research directions.The main innovation is reflected in two aspects:First, the paper analysis the sources of franchise value on insurance company. Second, empirical testing the self-discipline of franchise value on property insurance companies in our country based on theory analysis.Inadequacies of the article:First, this article did not analyze the applicability of the franchise value on insurance company, and just do a preliminary verification of self-discipline of franchise value on China's property insurance companies. Second, for the franchise value of the measurement problem and the source of franchise value on insurance company, the paper does not make in-depth analysis. It does not do some analysis on the influencing factors of insurance company's franchise value.