Insurance Company's Capital Structure And Financial Policies Of The Theoretical Analysis

The research on financial attributes of insurance company has raised increasing concern. Traditional approaches focus on such applicatory fields as solvency and asset liability management, while fundamental theoretical basis for financial operation of insurance company has drawn little attention. Two reasons are given about such a phenomenon. One is that the science of financial management is comparatively more perfect than that of corporate finance and less influenced by the underlying economic theory. So researching from the perspective of financial management has two advantages as lower difficulty and clearer path. Another reason is that the bias in recognizing the significance of fundamental theory has led the supervisors and theorists to overvalue the practical needs of financial operation of insurance company and its supervision. In fact, judging from the relationship between corporate finance and financial management, we can clearly see that the theories on capital structure, net cost of capital and dividend distribution from corporate finance are absorbed into financial management. The significance and urgency of fundamental theoretical analysis should be recognized.The main content in the thesis belongs to fundamental theoretical analysis about corporate finance of insurance company. According to logical sequence, the main theoretical results reached are listed as the following:(1)the calculation of insurance company liability and its application. Generally, the main liability (reserve) is calculated through actuarial method. It is the optimal estimation adopting advanced mathematical skill on the premises of related variables as mortality and interest rate. Different from actuarial approach, security pricing in financial economics adopts the fundamental methodology called asno-arbitrage pricing. Since insurance policy essentially belongs to state-contingent liability and has similar attributes to option contract, the pricing of insurance liability can use no-arbitrage pricing method in theory. The basic prerequisite for no-arbitrage pricing is that security itself has an open market. Insurance liability lacks such a mechanism of constraints from continuous arbitrage. Therefore, we utilize a model about the calculation of insurance liability raised by David Babble in 1998: PV(L)=FV+MV(TA)+CO-MV(E), and further explain the economic implication and its usage. In a market background with more merge and acquisition which are connected with liability pricing, the equation and its revealed implication are of great value.(2)the relationship between market value and capital structure of insurance company. In typical corporate finance theory, how to search for an optimal capital structure is an important issue. Traditional opinion holds that owing to tax shield effect of debt financing market value is positively related to debt equity ratio. Since bankruptcy cost and agency cost rise as well following the increasing of financial leverage, market value does not increase monotonously with financial leverage. Thus an optimal capital structure does exist. Herein the thesis points out that to insurance company market value increases with the increasing of financial leverage owing to the rise of call option value of equity. But the rise of financial leverage also brings about the surrender of the insured, the decline of expected premium revenue and possible violation of legal solvency supervision, market value does not increase consistently with the rise of financial leverage. The relationship curve is similar to that revealed in typical corporate finance theory, but the implication of the curve is fairly different. (3)the relationship between capital structure and financial policy in a complete market. MM theorem 3 indicates that financial policy is not related to capital structure in a market without friction. In the thesis wepoint out that the complete substitution of different capital structure under the same financial policy can not be realized for insurance company. This is ma...