The Impact Of Interest Rate Fluctuation On The Supply Ability Of Insurance Companies

In recent years, China’s insurance industry has experienced a substantial growth, but certain issues on the supply-side have also gradually come to surface. Generally speaking, the mismatch between insurance supply and demand leads to the fluctuation of premium growth rate and even to the partial dysfunction of the industry. As for the insurance companies, the supply side issues not only affect their business scales, but also their operating efficiency due to the instability of the profit made.It is of great essentiality to study the influence of interest rate on insurance companies’ supply capacity. The reason lies in that interest rate variation can influence insurance companies’ equity value and supply capacity through affecting their profit made in the underwriting and investment segments. Only through the discovery of the pattern how this external factors influence the insurance companies’ ability to supply, will they better cope with the risks coming along with interest rate variation, operate stably and make the insurance mechanism work its function in both securing and promoting economic growth.Firstly, through theoretical analysis, we explain the influence mechanism of interest rate on insurance companies. We also discuss how the operating factors affect the sensitivity of insurance companies’ supply capacity toward interest rate, including the market risk coefficient of the companies’ investment portfolios as well as that of underwriting portfolios, and the financial leverage level of the companies, etc.Then, taking the characteristics of stock market returns into account, this paper illustrates the fact that the influence of interest rate on insurance companies’ supply ability is actually reflected in the relationship between stock returns of the companies and interest rate fluctuation. A GARCH-M model is established to empirically test such relationship mentioned above in order to simulate the influence interest rate variation has on sample companies’ supply ability.The empirical analyses show that, for insurance companies listed in mainland China, the sensitivity of stock returns to long-term interest rate fluctuation is significantly positive, but not significant when it comes to short-term fluctuation. This implies the negative correlation between the sample companies’ equity value and the long-term interest rate changes. This means that interest rate’s rise in the long-term would make sample companies’ overall underwriting and investment profit go worse, the total equity value decline, and the future supply capacity damaged.Considering the above influences interest rate fluctuation has on supply ability, insurance companies should improve investment management, adjust operating leverage and adjust product structure to cope with the risks brought by interest rate variation, thus ultimately achieve stable operation.