The Measurement Of Economic Capital Of Underwriting Risk In Chinese Property&Casualty Insurance Company

With the changing of domestic and international economic environment, Chinese insurance companies are facing more and more risks. Minimum solvency requirement set by the regulator and the pursuit of the profits by shareholders require the company have more capacity to manage its own capital. The new trend of capital management is economic capital management. Property&Casualty (P&C) Insurance companies have a higher demand for the capital management since it involves larger variations in its line of businesses (LOB). Underwriting Risk is the most important risk of P&C Insurance companies. The capital charges for underwriting risk will largely determine the total capital that should be held by P&C companies.Under the on-going assumption of P&C companies’business and based on the observed loss ratio data of LOBs, this dissertation adopts Vine Copula to capture the dependency structure of loss ratios of different LOBs and get the joint probability distribution of all LOBs’loss ratio through simulation. And thus obtains the simulated total loss ratio distribution. Then, this thesis gets the distribution of potential loss of next period based on premium income of the current period. At last, this dissertation uses Wang Risk Measure, one famous concave distortion risk measure, to determine the economic capital charges for underwriting risk.For better illustration, this paper takes one typical Chinese P&C insurance company as an example. The main results of this case could be summarized as follows with the increasing of risk level, the difference between the economic capital determined under C-Vine Copula and multivariable T-Copula increase first and then decrease. The value of Wang Risk Measure is higher than Value-at-Risk (VaR) at lower risk level, but less than Tail Value-at-Risk (TVaR). But Wang Risk Measure is less than Value-at-Risk (VaR) at relatively higher risk level in this case. The above result shows that Vine Copula could better fit the dependency structure of different LOBs than elliptical Copula. Wang Risk Measure could adjust the capital charges for the risk based on the whole risk level of the company, which is more flexible than VaR and TVaR.At last, this article provides suggestions from the aspects of the construction of insurance industry database, structure optimization of LOBs and reinsurance arrangement. And points out that a solid insurance industry database, a good LOB structure and a comprehensive reinsurance arrangement plan are beneficial for the P&C insurance companies to manage its underwriting risk and reduce the capital charges for the risk.