The Measurement Of The Equity Investment Credit Risk Of Life Insurance Companies

In recent years, China’s insurance industry is developing very fast, and foreigninsurance companies began to enter China, so the competition of our country’sinsurance industry is becoming very fierce. The insurance companies’ profit dependsmainly on underwriting profit and investment income, as China’s insurance industry’scompetition is becoming more and more fiercely, insurance companies’ underwritingprofit is getting smaller and smaller, so insurance companies’ profit is increasinglydependent on investment income. On the other han d, China’s regulatory is relaxing theregulations on insurance companies’ investment, which means that the insurancecompanies will use more insurance funds for investment in the future in order to gethigher returns, however, the investment credit risk that insurance companies face willalso increase at the same time.There are mainly three kinds of credit risks for life insurance companies:reinsurance credit risk, premium receivable credit risk and investment credit risk. Inpractice，life insurance companies’ reinsurance credit risk and the premium receivablecredit risk are quite low. Life insurance companies’ investment credit risk on bankdeposits and bonds is also low, so their main credit risk investment comes from theequity investment. Thus, this thesis tries to measure the insurance companies’ equityinvestment credit risk.The most commonly used credit risk measurement models are Creditmetrics model,Creditrisk+model, KMV model and Credit Portfolio View model. This thesis makes acomparative analysis on these four models in detail, and concludes that KMV modelis ideal for the measurement of the equity investment credit risk of life insurancecompanies. The risk correlation between different assets can be measured by Copulafunctions, and the GARCH model is very effective describing the return rate andvolatility of equity, so Copula-GARCH model can be well used in the measurement ofthe volatility of portfolio’s return on equity. Combining Copula-GARCH model withKMV model, we can get a better model for the measurement of equity investmentcredit risk Copula-GARCH-KMV model.This thesis takes a life insurance company as the research object, and chooses itstop four equities in amount to measure its equity investment credit ris k. Based on theclosing price of the four equities last year and the Copula-GARCH-KMV model, we can get the default probability of each equity separately considering correlation ofdefault probability of these four equities. The result of the calculation shows that thislife insurance company faces a certain amount of equity investment risk, so it needs tomanage its equity investment risk properly. Finally, based on the characteristics oflife insurance companies’ equity investment, this thesis gives several suggestions onthe management of the equity investment credit risk.