The Applied Research Of Finite Risk Reinsurance In Non-life Insurance Market Of China

With the development of sociality and industry as well as increasingly global warning, humankind has faced severer and severer catastrophes. Unprecedented ruin in USA was caused by Hurricane Katrina in 2005.More than 80 thousands death and disappearance was attributed form the Wenchuan Earthquake, magnitude 8.8, in 2008. In 2011, more than 20 thousand victims, incalculable economic loss and environmental impact were given rise from magnitude 9 earthquake, tsunami and nuclear crisis ranked 6 concurred in Fukuoka, Japan. Meanwhile, increasingly high sum operational risk has become the third large risk, just after critical risk and market risk. In 1995, improper operation caused the sudden bankrupt of Barings Bank, a bank with more than 100 years history. Huge disaster risk and operational risk frequently involving compensation of large sums, the risks without numerous homogeneous risk for sharing, induce the almost incapacity of traditional reinsurance, which leverages the capital markets and becomes the consensus between insurer and reinsurer, such consensus has brought in finite risk reinsurance. Risk and capital are on both sides of one coin. The value of finite risk reinsurances only in risk management, but also it exert a large effect on the levels of financial management and internal governance, such as reasonable tax avoidance, cash flow adjustment, smoothening of financial performance and isolation of poor business.It is expected that on the background of continuing huge disaster risk induced by global warning and environmental deterioration, operational risk with increasingly large sum and fierce market competition, development of finite risk reinsurances could be a tendency. How to conform to the trend and utilize the effective tool is an urgent and necessary question for Chinese insurance industry. Currently, practice and theoretical research of finite risk reinsurances in China are still on elementary level, as a result it is strongly practical to study such question. Based on the consideration above, author of this thesis selects application of finite risk reinsurances in China as the research object. On the base of through description on the nature of finite risk reinsurance contracts, and of the background of a specific market in China, application value of finite risk reinsurance has been analyzed and its practical conditions have been explored, and in the end advice about finite risk reinsurance’s development in China has been given tentatively.This paper is consisted by the introduction and full test parts, body parts are divided into five chapters. Introduction discusses the need of finite risk reinsurance at first, which is also the significance of this article, then reviews the related research theories from the perspective of domestic and international, and finally makes a brief summary of the author side of this study and logical structure.The first part of the main body is the finite risk reinsurance overview. As the basis for this chapter, this part analysis the finite risk reinsurance in a detail way and make a comparison to related concepts. Section I of this part descript three characteristics of the finite risk reinsurance, which is non-traditional risk transfer instruments, risk financing and insurances, the structure of FRI make it have the feature of ART, the structure of limited risk contract determine their loss is different from traditional insurance financing property, transfer real risks makes it has the insurance feature, the three of which constitute the three essential properties of finite risk reinsurance. Section II of the limited Risk reinsurance morphology, characteristics and product description from the contract outlines the two aspects of finite risk reinsurance perceptual knowledge. The third Section, to further clarify the concept of finite risk reinsurance, I compare finite risk reinsurance with traditional reinsurance and financial reinsurance, in order to make the concept clearer.The second part analyses the international application of FRI. Mainland China hasn’t had reinsurance practice operation yet, while Hong Kong and Taiwan regions is involved only for the reinsurance, whether theory and practice level is in its initial stage, so study abroad application experience is very valuable for China. The first section introduces the international experiences, the history is the mirror that can reflect the times changing, so the author elaborates the developing course of FRI abroad at first, so that we can compare and judge that whether china has get the related conditions already. After that, the Author introduces the application status abroad, especially the regulations construction level, because regulations construction can reflect the development level of FRI to some degree. The second section is set to discuss what can we get from the external experience, I think we can get three inspirations at least through studying abroad:1. FRI application is a kind of trend, furthermore, insurer’s internal need and the external risk environment changes contribute FRI’s further development in china; 2.it’s very necessary to formulate relevant laws or regulations at first, or it will lead to abuse much more easily than you think; 3.Nowadays, china’s insurance industry is just in the junior stage, so American’s strict supervision model may be much suitable for us, and we could reference the American regulatory system in our developing process in the further.In the third part, we talk about the practice value of FRI for Chinese Non-life insurances companies. In the first section, the author explains why china’s non-life insurance company need FRI from two aspect:the one is the problem of our insurance market, such as weak profitability, lack of solvency by enlarging business scale blindly, low level of company risk management and relatively unregulated industry standards, while the other one is the lack of FRI in our insurance market. The second section explores the function of FRI in detail. This paper makes a quantitative analysis to representative products of expected type and reverted type of FRI, which is the FRI of FQS and LPT products, in that way we can get a clear understanding of FRI’s function in financial management and risk management. On the base of the two sections, section three concludes the use value of FRI in our non-life market, which include manage cash flows, moderate-high severity/low frequency loss profile, high tolerance for risk retention/profit sharing, strong financial statements and sophisticated risk management systems, etc.Part four discusses whether FRI can be adopted in china’s insurance market at the present stage. Section one talk about what use conditions we should equip, I suppose at least three requirements should be acquired, then the FRI can be develop, the requirements include:legitimate demand of insurance company, Reinsurance companies provide responsible solutions, Corresponding supervision mechanism and accounting standards. Section two provides some suggestions to develop FRI for china, such as Admittance and provide policy guidance, constructing the relevant insurance regulatory system, and reserve talents, strengthening disclosure and normative insurance company internal use, etc.Summary and Outlook for the fifth part, this section reviews the main points of this article, and reaffirmed the future development of finite risk reinsurance in China.The possible innovation points in this paper are:first, the research object is novel, the theory study of FRI in china is on the initial stage, and always focus on the introduction of the products or regulations, the research about its applied problem is very scare, although some scholar wrote essay about it, but its research comparatively broad an in-depth, so the author depth analyses the FRI’s value and application conditions in china, there is the innovation in research object. The second possible innovation is the content, this paper combines FRI with china’s specific insurance market, concludes FRI to Chinese insurance company’s value, and try to make some suggestions about FRI application in china.