Analysis On The Application Of Dynamic Financial Analysis In The Insurance Companies’ Asset-Liability Management

Since reform and opening up, China’s resumption of development of the insurance industry has been more than30years. During this period, the premium income has improved dramatically, the breadth and depth of the underwriting business has also achieved considerable development. However, the market economy often represents uncertainty in the operating environment. The insurance industry has developed rapidly in the past30years, operating risks faced by insurance companies show increasing complexity of the situation; especially under the interest rate liberalization backdrop, the risk of interest rates is rising continuously. How to ensure the stability of companies operating in a complex environment has become the first problem to solve for the present insurance company in China. Using asset-liability management techniques reasonably to control the risks faced by the company is an effective approach to solve this problem. But in view of the development of China’s insurance industry is short, the company’s asset-liability management technology has not yet reached the international advanced level, so they are often using more traditional methods of asset-liability management. In today’s increasingly fierce international competition in the insurance industry, it will make our insurance company in a very disadvantageous position. So how to learn and apply advanced methods of asset-liability management is of great significance for the insurance company at this stage.Dynamic Financial Analysis (DFA) currently as a more advanced approach of asset-liability management in the world, has its own unique advantages in many respects, such advantages are attracting more and more insurance companies on its research, even many places in developed countries has widely applied this technology. The biggest difference between DFA with the traditional asset-liability management approach lies in its ability to carry out the control of the company’s overall risk, it can not only study the risks faced by individual business lines, but also make more accurate and effective assessment of the company’s overall business risk from the standpoint of managers; Not only can it help policymakers make decisions, but can also make comparison of the pros and cons of different strategies; Not only can it make separate simulation, but can also use a combination of traditional techniques. Therefore, for our insurance companies, an earlier introduction of dynamic financial analysis technology is of great significance.The main purpose of this paper is to do a more comprehensive discussion on the dynamic financial analysis, and specifically set forth in its application to the insurance company. Under the guidance of this purpose, this paper is divided into five major sections, and there is obvious logical relationship between chapters. First, from the growing of the interest rate risk faced by insurance companies to start, we point out the necessity and importance of asset-liability management for the insurance companies, and then we make an introduction of asset-liability management methods currently used by the insurance companies, and also make some brief evaluation. By comparing between them we lead to a dynamic financial analysis technique, which is the most advanced asset-liability management technique. This paper focuses specifically on the dynamic financial analysis technique used in the insurance company, from its origins to each major variable which has been made modeling analysis; we use a large section for its theoretical explanation. On the basis of theoretical research, the paper makes empirical research in the fourth chapter, through specific practical application of dynamic financial analysis to illustrate its huge superiority. The final conclusions of the study are given at the end of this paper as well as the thinking of China’s insurance industry. We will describe in more details for the content of each chapter below.The first chapter is the introduction of this paper. It is divided into four main parts. First is the description of the background and significance of this study, followed by a brief review of literature on dynamic financial analysis in domestic and overseas; Part3is to introduce the main methods and structure arrangements of this study. At the end of this chapter we make necessary instructions of the innovation and inadequate of this paper.The second chapter focuses on the current status of the insurance company for asset-liability management. There are three sections in this chapter. At the beginning we introduce the development of the insurance company’s assets-liability management theory, pointing out that it is due to the change in three aspects of the1970s American insurance industry occurred that prompted the insurance company to start with asset-liability management, and subsequently we make instructions of the development of asset-liability management trends. The second part of this chapter focuses on the introduction of main asset-liability management technology which is currently used by insurance companies, and then gives them a brief evaluation. These technologies include:cash flow testing techniques, cash flow matching techniques, gap analysis, duration immunization techniques, value at risk techniques and dynamic financial analysis. One aspect of the detailed description of these technologies is to compare them below and highlight the advantages of dynamic financial analysis; on the other side, in the practice of dynamic financial analysis, we can make use of them as the theoretical basis of DFA. For example, in the framework of the DFA model, we can make utilization of value at risk and immunization techniques. Undertaking the second part, at the end of this chapter we obtain several advantages of DFA compared to conventional technologies by comparing the characteristics of several technical methods, and we point out that dynamic financial analysis has already represents a direction of development of asset-liability management techniques in the future, by the great advantages in theory and application.The third chapter is to build the DFA model in insurance companies’asset-liability management. This chapter is one of the key sections of this paper, the main research is on the methods to build an insurance company DFA model, which is divided into four parts to describe. This chapter starts with the review of origin and the development of DFA. The second part focuses on the scenario analysis and stochastic simulation, which are the two main methods for DFA model. By the comparison between them, we point out that stochastic simulation has great advantages in practice, and has been adopted by most of the DFA models. Next, the third part gives a systematic study of the results and framework of the DFA model, each module of the framework is introduced in detail, so that we can have a macroscopic grasp on the DFA model. The fourth part of this chapter is to model the main variables of the modeling analysis, this part makes use of a large number of formulas and statistical knowledge, focusing on seven main variables analyzed in the model, namely:(1) interest rate model;(2) the inflation rate model;(3) the change of claims business model;(4) stock returns model;(5) loss model;(6) underwriting cycle model;(7) claims payment model. Modeling analysis allows us to have a microscopic grasp on the model. In the final chapter, we make a brief description about the scope of application of the DFA model in insurance companies.The fourth chapter is application of the DFA model in insurance companies’ asset-liability management. This chapter introduces the computer software Dynamo3.0of dynamic financial analysis, and then makes simulation analysis combined with software for a fictitious company data. Through empirical testing we not only illustrate the advantages of dynamic financial analysis in application, but also provide a reference to build Chinese version of the DFA model in the future.The fifth chapter is the conclusion and thinking of this paper. This chapter is divided into three parts, the first part gives the conclusions of this study; on the basis of the conclusions we carry out some thinking of application of DFA models in China, and make some suggestions; at the end of this chapter we concludes with a description of the limitations of research background and the lack of research results, and future research are discussed.In this paper we focus on the dynamic financial analysis techniques by making a relatively comprehensive study, striving to obtain the applicability of DFA in our insurance industry. But it is undeniable that, due to the complexity of the model, it needs tireless efforts of a large number of researchers working if we want to get a full and detailed dynamic financial analysis model fitting our country condition. This paper just makes some attempt on the use of the model, and I hope to provide some superficial reference study in the future.