Empirical Research On The Solvency Of China’s Life Insurance Company

Since we resume insurance business in80s of last century, the life insurance markethas maintained a sound momentum of development in China. By the end of2013, there are69life insurance companies, which is two-and-a-half times as many as that by2004.In thepast year, the premium income of life insurance was1074.1billion Yuan, which is3.4times as many as that by2004. However, with increasingly fierce competition and gradualmarket opening-up, life insurance operation risk is increasing, which leads to the seriousinsolvency of some life insurance companies now.Solvency is the lifeblood of a life insurance company. In2005, China Life and otherlife insurance companies due to the solvency margin below the statutory standards receivedregulatory letter from the China Insurance Regulatory Commission. This is the first timeChina Insurance Regulatory Commission has granted regulatory submissions to lifeinsurance companies because of solvency problems, strongly shocking the china insuranceindustry. In2012, the solvency adequacy ratio of Happy Life and three other life insurancecompanies was less than150%of the regulatory requirements. These companies had beensuspended the right to add new branches by China Insurance Regulatory Commission.Solvency crisis of life insurance companies backs into the spotlight.According to the size of China life insurance Company’s asset, China life insurancecompanies are divided into three categories: large-sized companies, medium-sizedcompanies and small-sized companies. Based on China life insurance company’s businessdata, firstly, this article attempts to comparatively analyze the solvency’s influencing factorsof large-sized companies, medium-sized companies and small-sized companies. Second,this article assesses the current situation of China life insurance Company’s solvency byprincipal component analysis. Above study of China life insurance Company’s solvencyoffers a new perspective. It not only helps China life insurance companies morescientifically evaluate their solvency, avoiding the risk of bankruptcy due to insolvency, butalso helps China Insurance Regulatory Commission to establish and perfect the system of the second generation of solvency regulation.This article is divided into six parts: The first part primarily summarizes thebackground and significance of the research, then combed the research literatures. As thetheoretical basis of this article, the second part mainly introduces the meaning andinfluencing factors of solvency, the meaning and influencing factors of solvency regulation.The third part briefly analyzes the current situation of China life insurance companysolvency and development of China life insurance market. The fourth part comparativelyanalyzes the solvency’s influencing factors of large-sized companies, medium-sizedcompanies and small-sized companies by gray correlation analysis. Empirical results showthat:(1) the grey correlation of large-sized companies is almost opposite to the greycorrelation of small-sized companies due to the different asset size between them.(2)Because medium-sized company has advantage of capital relative to small-sized companyand advantage of flexible management relative to large-sized company, the grey correlationof medium-sized company can be seen as the complex of large-sized company andsmall-sized company.(3) There are some similarities about grey correlation among threecategories, such as the reinsurance ratio. Three categories’ absolute and relative greycorrelation of reinsurance ratio are all ranked next to last. In terms of the absolute amountor rate of change, reinsurance ratio is all less relevant to the solvency margin ratio. Themain content of the fifth part is to assess the current situation of China life insurancecompany solvency by principal component analysis. Empirical results show that:(1)liquidity, profitability, capital size and the ability of investment have a greater influence onthe solvency of large-sized life insurance company. Based on reasonable arrangements forsize and structure of assets, this article suggests large-sized life insurance companies shouldmake great efforts to improve their profitability and the ability of investment so that thesolvency of large-sized life insurance companies can be improved abidingly.(2) Liquidity,profitability and capital size are also the main influencing factors affecting medium-sizedlife insurance company solvency, but the ability of investment gives smaller contribution toimprove the solvency of the medium-sized life insurance company than large-sized lifeinsurance company. This article suggests medium-sized life insurance companies shouldactively develop their investment business, while they expand their underwriting business. (3) The participating insurance businesses of small-sized life insurance company developrapidly, making its solvency influenced greatly by the dividend payments, thecompensation expenses and the ability of developing business. This article suggestssmall-sized life insurance companies should arrange product mix of their life insurancereasonably and make great efforts to expand the market share of traditional life insuranceproduct. According to the foregoing analysis and empirical results, the sixth part of thisarticle puts forward some suggestions to improve the solvency of China life insuranceCompany from life insurance company and solvency regulation system perspectives.