An Empirical Research On Pro-cyclicality Of Insurance In China

The study of the pro-cyclicality of ifnancial system has become research focus inthe economic circles since the ifnancial crisis. This pro-cyclicality is considered to bethe reasons of the vulnerability of the ifnancial system. Such studies of pro-cyclicalityfocus on the majority of the pro-cyclicality of bank industry. With the developmentand maturity of the insurance industry, the role of insurance in risk-sharing andgathering capital becomes more prominent. Therefore the rule study of China’sinsurance industry is in favor of mastering the law of pro-cyclicality and targeting toavoid the possible risks.Pro-cyclicality, however, has not been given a clear and uniifed deifnition in therelated extensive research literature. After sorting out large number of documents,four different deifnition of pro-cyclicality has presented. Through the study of thetheory based on reality, the paper selects three research direction, which including theinsurance pro-cyclicality toward GDP, the insurance pro-cyclicality toward savingdeposits and itself pro-cyclicality, and intuitive analysis and basic assumption aremade on the mentioned three direction by collecting data.In the empirical research of pro-cyclicality in China’s insurance industry, theexistence of the pro-cyclicality has been tested ifrstly. On this basis, through empiricalanalysis of the influencing mechanism, the formation mechanism of pro-cyclicality inthe insurance industry has been indicated more clearly.In the study of the existence of pro-cyclicality in China’s insurance industry, theco-integration method is applies in the paper. It is generally believed that the presenceof long-term co-integration relations can determine the existence of pro-cyclicality. Inthis article the co-integration relationship between the two sets of variables ofpremium income and GDP, premium income and savings deposits and theeffectiveness of the model has been tested by collecting the panel data during1998-2011from the31provinces and cities. The Co-integration test results indicate that thelong-term co-integration relationship between premium income and GDP, premium income and savings deposits do exist. So does the relationship exist between premiumincome and itself, which tests the pro-cyclicality existence.In the fourth part of this article, from different angles and different emphases, thethree aspects of the pro-cyclicality have been tested through Granger causality test,Estimates of the VAR model，Co-integration Test and Filter Decomposition bycollecting the data of China’s gross domestic product (GDP), savings deposits andpremium income between1998-2011,in which Granger causal relationship makesdescription between variables in qualitative, the regression model makes theQuantitative description, the impulse response function describes the impact of GDP,savings deposits and the fluctuation of the premium incomes itself toward premiumincomes，while variance decomposition makes the quantitative research ofcontribution of the three variables affecting the lfuctuation of premium incomes. Theanalysis show that, both from a short-term or long-term point of view, the premiumincome，GDP and savings deposit balance fluctuations are important reasons toexplain the premium income fluctuations, among which especially GDP accounts fora larger proportion in the affecting factors of the pro-cyclicality in the insuranceindustry, which in a certain sense indicates the strong pro-cyclicality of China’sinsurance industry toward GDP. The fluctuation in the balance of savings deposits？which explains that in premium income is not as obvious as GDP, but such role ofexplanation is quite obvious and can be taken as the important reasons of Insurancelfuctuations.On the above basis, the paper summarizes the conclusions and makes a briefanalysis of the positive signiifcance of the two pro-cyclicality and the possible risksand accordingly give the proposals including enhance the risk perceptions ofinsurance institutions, internal risk management, changes in the insurance industryincentives and the establishment of a counter-cyclical regulatory.The contribution of this paper is sorting out and extending the meaning of thepro-cyclicality, makes the empirical analysis of three aspects pro-cyclicality ofinsurance industry in recent years to test the existence. In the research ofpro-cyclicality before, it is generally focused on the test of the relationship between a variable and the premium income，so the innovation of this paper provide new ideasfor a more comprehensive analysis of the pro-cyclicality of the insurance industry,which has certain practical signiifcance by timely adjusting the strategy and relevantpolicies of the development of the insurance industry according to the law. In addition,the pro-cyclical economic analysis on the insurance industry and the correspondingpolicy recommendations as the implementation of the relevant policies of theinsurance industry reference. In addition the economic analysis and the correspondingpolicy recommendations in this paper can be referred as the relevant policies of theinsurance industry. The inadequacies of this article is failed to do the empiricalanalysis of the formation mechanism of the two veriifed pro-cyclicality of theinsurance industry, and therefore can only do a qualitative analysis of the theoreticalreason and policy, so only quantitative analysis can be made on the reason andpolicies in theory.