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Life Insurance Company Liquidity Risk Management Study

Posted on:2003-10-15Degree:MasterType:Thesis
Country:ChinaCandidate:H ZhangFull Text:PDF
Abstract/Summary:PDF Full Text Request
Depository institutions always have been paying great attention to the control of liquidity short risk. It is argued that life insurance companies should not have to attach importance to liquidity short since they have been running based on the actuarial principle with long-time assets and liability and then would have no liquidity requirements. However, it is worth mentioning that each enterprise requires current assets and circulating fund to pay their own debts during day-to-day operating, so do life insurance companies. Another reason is that for a long time, accumulating a huge amount of business, the life insurers would have undertaken contingent liabilities just like those of the general insurers. And up-to-date characteristics in operating assurance are emerging: new types of insurance production, such as Universal Life Insurance and Flexible Premium Adjustable Life Insurance, have caused the fund originating and operating in life insurance companies become not as regular as level premium insurance has. And the fund flow is much more likely to be influenced by interest rate and the policy holder's option than before. At the same time, the actuarial model, which performs depended on certain assumption of fixed interest rate, could not show and demonstrate the changing process dynamically and completely. So it is necessary for life insurance companies to form a unique system of liquidity short risk control with the aims to guarantee sufficient liquidity of assets and liability to carry out insurance policy and other payments.This thesis is designed to interpret how liquidity short arises in life insurance companies and what detailed tactics could be taken. Of all ways of ALM, the most efficient one, in the author's viewpoint, is dynamic analysis system. In detail, this thesis includes the introduction and three main body sections:The first paragraph of the preface states the study purpose of thethesis, then the following part gives definitions of liquidity requirements and liquidity short and their forms of expression are listed. It is clearly stated that the object of study is how to control and monitor liquidity short for life insurance companies. The study methods are interpreted as an indispensable content. The introduction foreshadows the following statement and further study.The first section clarifies specific characteristics of assets and liabilities of life insurance institutions and analyses how the liquidity short risk arises and what can help to bring about it, including the superficial cause and profound reason. The superficial cause is the irregular laws of fund originating and operating. The conflicts between liquidity and profit nature of one asset impel the managers to make choices: either one or the other. What deeply affect the liquidity of asset and liability is elaborated in detail as following.Section two links section one with section three closely and plays an important role in the whole logic structure. As we all know, ALM (asset and liability management) is basically a hedging response to the risk in financial institutions in form of a simple gap model that analyzes risk in terms of cash in-flows and out-flows. As a result we need to explain why ALM could be applied to control liquidity short arising in life insurance entities. Development course and chief content of ALM practiced in risk control system of life insurance enterprises are introduced so that it could be concluded that ALM is an effective way to take precautions on liquidity short.Section three is the core of the whole thesis, which expounds the concrete tactics on controlling and monitoring liquidity short using the way of ALM. Three main principles of risk management are set forth before the further statement. Of all rules, the most important one is to set up dynamic analysis system. By comparison with static methods, dynamic cash flow test has matchless advantages. There are five steps in cash flow classify insurance lines. Different lines present distinct features of c...
Keywords/Search Tags:Liquidity Short, Asset and liability management, Dynamic Cash Flow Test
PDF Full Text Request
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