The Risk Factors Influencing The Dynamic Solvency Testing Research

Solvency, refers to an insurer’s economic ability to compensate all the due debts and insurance responsibilities, especially when compensation or benefits occur beyond normal conditions. The current property insurers in China are faced of more serious solvency risk, and also static regulatory model has been unable to meet today’s needs for risk prediction. In order to achieve better prediction effect, dynamic solvency regulation is included in the new regulatory system. This thesis mainly introduces the dynamic solvency testing model, as one of the dynamic regulation methods. Dynamic solvency testing puts forward assumptions of various business conditions, and then uses computer technology to simulate various scenarios to determine the adequacy level of insurers.This thesis mainly analyses the risk factors to impact the dynamic solvency testing in China’s property insurers. According to Compilation Rules by CIRC, China’s dynamic solvency testing selects internal financial data like premium growth rate, premiums retention ratio, loss ratio, expense ratio, investment yield, and etc. to predict solvency conditions. This thesis argues that these factors are merely reflecting non-systematic risks inside insurers, while risk factors of interest rate, inflation and the economic growth rate will also impact the solvency. Therefore, the thesis takes GDP growth and interest rate into consideration in the solvency risk factor model, besides a series of financial ratios, and makes linear regression for solvency adequacy ratio. As a result, loss ratio, expense ratio and investment yield, as well as real interest rates and GDP growth rate are proved very significant, while premium retention rate and premium growth rate are less significant.Based on the factor analysis, stress testing is also introduced to strengthen the result above. Stress test estimates the impact on solvency under the current average level of risk, as well as the probability of insolvency when a series of changes in risk factors occur. The result is consistent with the empirical result of the risk factor model.The innovation of this thesis is to emphasize the same importance of external macro factors to analyze solvency risks with internal risk factors, based on our current dynamic regulatory requirements, and also apt to improve the dynamic solvency testing method, as well as strengthen the effect of early warning. However, there are also some shortages such as difficulties in data collection, inaccurate recognition proportion for asset and liability, so there may be errors in the empirical results.