Chinese Life Insurance Company Interest Rate Risk Management

Since China join into the WTO, the economy developed rapidly, especially thefinancial markets open and the interest rate fluctuate greatly cause of Chinese lifeinsurance companies have appeared spread loss solvency decline , seriously affectedthe operating and development of Chinese life insurance companies. Moreover,foreign life insurance companies come into domestic market, the domestic lifeinsurance companies does not have any policy advantages at all, they can only rely onthe new higher profit products to attract customers, but ignore the prevention ofinterest rate risk. In addition, Chinese life insurance companies rely on premiumincome invest to other financial products to gain the profit, the profit will fulfill theexpired insurance liability. Interest rate fluctuate will affect the profit of investment,thus impact its solvency, profit and operation.First of all, this article describe the basic theories include the meaning,characteristics, identification of interest rate risk and interest rate marketizationimpact on Chinese life insurance companies. Analyze the interest rate risk appears isdue to the special pricing mechanism of life insurance products, the long-term andliabilities of life insurance business and the insurance policy options. Besides that, theinterest rate fluctuate will affect the supply and demand balance of life insurancemarket. There are three types of interest rate risk in Chinese life insurance companies:pre-interest rate risk, liability risk and asset-liability matching risk.Secondly, the article focusing on how the interest rate risk affects the assetmanagement, liability management, asset-liability matching, product demand andreturn on investment of Chinese life insurance companies, combination of theoreticaland empirical analysis. Applied the characteristics and calculate method of VaR to thedaily operations of Chinese life insurance companies, it play an important role inprevent the interest rate risk. But at the same time, VaR method has some limitations, therefore, it brings a lot of challenges for Chinese life insurance companies. Then,according to the scenario analysis and stress test of 2009 China Life InsuranceCompany, know that the interest rate fluctuate will change each item in balance sheet,and also affects the ability of resist risk of Chinese life insurance companies.Finally, give two aspects recommendations for Chinese life insurance companiesto avoid the interest rate risk, there are manage internal operation and improveexternal market environment. The internal reform include develop new life insuranceproducts, promotion security-based insurance, increase the investment profit. Theexternal market environment improve include strengthen life insurance industryregulation, regulate the insurance market, give some policy support for domestic lifeinsurance companies and develop the right life insurance consumer attitudes. Thesemethods will improve the ability to resist risks, and make sure the Chinese lifeinsurance companies can development long-term and healthy.