The Research On Economic Capital Measurement Of Property Insurance Company’s Investment Market Risk Based On Wang Transform

With the rapid development of the insurance industry in recent years of ourcountry, the competition of insurance industry becomes fiercer and fiercer。Due to thepressure of competition, the profit of underwriting business decreases, which makesthe use of insurance fund more and more important. With broadened investmentchannels, insurance companies increase the application of insurance funds one afteranother. Though being allowed to invest on many kinds of financial instruments, mostof the insurance companies invest on several of them such as deposits, securities andstocks, and the portfolio seems improper, which leads to great investment risk. Theregulator has issued rules that insurance can invest on bonds whose credit ratingshould be above AA level, which greatly decreases credit risk, so market risk becomesthe major risk of insurance funds investment. To measure investment market riskeffectively is full of theoretical and practical significance, which could help thecompany manage it efficiently, and improve the entire revenue of the insurancecompany.This thesis deals with investment market risk of insurance funds investment withwhich property insurance companies are faced. In the first place, it analyzes theinfluence that the market risk makes on the solvency of property insurance companies,based on which, it analyses the current situation of investment market risk anddiscusses the relationship between economic capital and investment market risk. Aftercontrasting lots of measurement instruments, this thesis chooses Wang Transform, anddissects its origin, characters and usages. Then, it sets up Wang Transform mod el tomeasure the economic capital of property insurance companies’ investment marketrisk, and makes detailed description of its principles, elements and implementation.Finally, taking a representative property insurance company as an example,eliminating the impacts of financial crisis in2007, it chooses the index data oftreasury bonds, financial bonds, corporate bonds, securities investment funds andstocks from January,2010to March,2011as research objects, defines the situationwhere return rates is less than deposit interest of the same period as loss. Based on thecharacteristics the indexes turn out, it chooses GARCH model to match each index,catches the relationship among these indexes with Frank Copula, and adjusts thedistribution of the entire loss with Wang Transform to calculate economic capital. The empirical result shows that the economic capital based on Wang Transformis bigger than that of VaR, meaning that VaR underestimates loss, while WangTransform can adjust the distribution of loss, and in turn enhances the accuracy ofeconomic capital measurement of investment market risk.