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Analysis Of Life Insurance Company Solvency

Posted on:2012-05-07Degree:MasterType:Thesis
Country:ChinaCandidate:J SongFull Text:PDF
GTID:2219330371952773Subject:Quantitative Economics
Abstract/Summary:PDF Full Text Request
What is solvency? Simply put, solvency is the insurance company's ability to repay debt, which depends on whether the insurance company has sufficient assets to undertake the responsibility of future payment, especially for policy holders. By means of bringing a large number of insurable risks together, insurance companies earn profits by effectively managing these risks, with the use of various risk management strategies basically based on the principle of law of large numbers. Faced with possible loss people are always to avert risks. But some of these risks cannot be avoided, then people can buy insurance products to shift the economic risk of loss to the insurance company and then success to avoid the uncertainty of future loss. The insurance companies not only face the risk of underwriting risk, will also have their own business risk, both of which will impact the insurance company's policy holders by affecting the ability for insurance company to fulfill its commitments, even cause the company itself to go bankrupt. The bankruptcy of insurance company can cause serious impact on the stability of the whole financial sector, even the whole society. It's necessary to study the solvency of the insurance companies for several reasons. First, as an important financial institution, the stability of insurance companies is important to the stability of the entire economy and the public, because once the insurance companies becomes insolvent, the interests of policy holders may suffer huge losses, which may affect the stability of the entire financial system and even the entire economy. Second, the insurance company's liabilities characters uncertainty because these liabilities mainly depend on the insure company's future payment obligations. Moreover, the actuarial estimate is based on law of large numbers and usually will generate biases compared to the actual numbers. Since the premium is theoretically expected claims plus the additional security risks to develop, but generally the payment and the expectations are not consistent, therefore the solvency is more important. Third, the insurance companies are facing increasingly complex business environment full of more and more risks, for cxample, intense market competition, financial innovation etc. These trends are both opportunities and risks for the insurance companies. Currently there are many theories and methods to research the non-life insurance company's solvency while little for the life insurance company's solvency. But with economic development and dramatically increasing number of the life insurance companies, along with the life insurance companies continue to introduce new products and expand the company's investment scope, the life insurance companies themselves attract more and more risks. As China's reform opening up, the number of Chinese life insurance companies has risen dramatically from the initial state where there were only two life insurance companies:Chinese People's Insurance and Pacific Insurance. Now due to the entering of foreign insurance companies into China plus the return of Hong Kong insurance companies in China, the number is much bigger. Insurance premium income and investment income have been also increasing rapidly. Based on this, it is necessary to conduct in-depth life insurance company's solvency and system.At first, this paper summaries current researches of life insurance companies from home and abroad. Summarized in two aspects, one is the international research for the solvency of insurance companies related to all kinds of influential factors including economic environmental factors and the company's own operating factors; the other is a summary of domestic and foreign approaches for quantifying the life insurance company's solvency, including a variety of financial functions and common risk measure. And then this paper gives detailed analysis and expression a measure for the life insurance companies to quantify solvency, first brought up by domestic scholar, Fan Deng. Finally this paper conduct analysis of solvency of the life insurance companies based outstanding empirical data on the life insurance industry by means of cash flow and cash flow deficit. The analysis is modeled by EViews, the model is obtained after being simulated by randomly program which predicts the future of the life insurance company's cash flow position for the next year, given its cash low deficit and cash flows. The innovation of this paper is using effective model to measure the life insurance company's solvency and provide recommendations to regulatory authorities based on empirical analysis. On the other hand, the downside is lack of accuracy of analysis result caused by lack of data derived from domestic insurance companies not to mention that the by-hand data is still not accurate enough. But the analysis result can still be a tough basis to provide valuable advice. I really hope that in future scholars can come up with better way to measure solvency, provide more choices for Chinese insurance industry and then protect our policy holder's interests.
Keywords/Search Tags:solvency of insurance company, random simulation, cash flow, risk measure, life insurance
PDF Full Text Request
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