Insurance Risk Management Studies

The impact of entering WTO on Chinese finance industry, especially on insurance industry, may be so dramatic that it may threaten the stability of the economy of the country. Thus it is necessary to study risks in insurance companies, risk measurement and risk shifting. Actuarial Science is an academic discipline of the synthetic frontier, which involves many fields such as Mathematics, Statistics, Computer Science, Accounting, Finance, Economics, Laws and Communications and Actuaries is to measure, model and manage risks.Development of world economy and changes in risk nature make reinsurance, the traditional tool of risk shifting used by insurance companies, no longer fit to new risk. It is necessary for insurance companies to seek new ways of risky finance from out of the traditional system to diversify and shift risks they are facing. Experience of developed countries shows that insurance companies can turn to the capital market to shift risks by insurance risky securitization .By using accepted investment tools such as primitive securities and derivative securities, they can shift risks to the capital market. So the products of insurance risky securitization are called "different products" for risk shifting. The purpose of the paper is to build up a set of theoretical frame by studying the ruin probability of insurance companies and insurance risky securitization, and to do something to the development of insurance industry and actuaries education of the country. The author models kinds of ruin probability and studies products designing and pricing of insurance risky securitization. There are five chapters in the paper:Chapter1:In this part, the author discusses the necessity for insurance companies to manage risks by analyzing bankruptcy of insurance companies in Japan and the challenges to insurance industry in China after entering WTO. When it comes to risk management, it matters to methods of risk measurement. Becausethe distributions in insurance are skew, it is necessary to introduce a new tool, the ruin probability.Chapter 2: As the number of claims follows Poisson process and the amount of corresponding individual claims follows the given distribution (for example, exponential distribution), the author generalizes ruin probability models and builds up a set of more perfect theoretical frame.Chapter3: In this part, the author simulates stochastically the ruin probability of insurance companies by using advanced computer techniques and tests some results of the second chapter. Chapter4:The author discusses insurance risky securitization, designing and pricing of its products and emphasizes the European option pricing and perpetual American option pricing. Based on reference [2] and using equivalent martingale or the risk-neutral nature, the author reaches exciting conclusions, which are similar to the Black-Scholes option pricing formula and Merton option pricing formula.Chapter 5: the author gives some suggestions to the development of insurance industry and actuaries education in China.