Operational Effectiveness Simulation Of China Agricultural Insurance Pool Under A Copula-Asset Liability Management Approach

Different from other risks, agricultural risk is large, infrequent, and potentially highly correlated across geographic regions, resulting in a difficult problem on risk management. Due to the late development of agricultural insurance in China, the insurance company sometimes fails to agricultural risk management and lacks of effective risk dispersion method. As an alternative option that internally pooling its insurance business across a number of geographic regions and/or product lines, the insurance company may control risk by purchasing private reinsurance or getting assistance from catastrophe reserves by local government. However, recent our country agricultural risks have been exposed for increasing reinsurance premiums, growing local government debt and imperfect catastrophe dispersed system.In this case, the insurance pool, a risk management method to disperse risk by risk sharing, becomes the best solution for agricultural insurance companies. Both domestic and international experience has verified its effectiveness on disperse catastrophe risk. At the end of 2014, China agricultural insurance and reinsurance pool was established as an innovative attempt to the agricultural insurance development. But it is still lack of theoretical analysis and quantitative models research about the operation and implementation.Based on the above questions, this paper is carried out with the study of the operational effectiveness evaluation of insurance pool. Using Copula model and asset liability management approach to build the mode of the pooling and evaluate the operation effect, we compare the different proportion of premium transfer effects on pooling operation. Furthermore, under same premium transfer ratio, we compare self-managed insurance pool and combination (a portfolio approach to combine a self-managed insurance pool and private reinsurance using correlation of the LCR) insurance pool.Through empirical research, we found that the higher premium transfer ratio can bring higher profit with less stable operation caused by the large risk. But conversely, under lower premium transfer ratio, although its profit maybe not be outstanding, but it is relatively more stable on the diversification and continuing operations. Compared with self-managed insurance pool, combination has an advantage in resistance to high risk and the stability of the operation. Especially when meeting with extreme risk in multiple region, such as flood and earthquake, it can effectively disperse catastrophe risk and keep stable operation.Therefore, agricultural insurance and reinsurance pool should select proper premium transfer ratio, transfer high risk to reinsurance market, and make full use of external capital market to increase capital reserves and improve the ability to resist risk. Along with government departments to build complete catastrophe risk dispersion system, it can provide the guarantee for healthy development of agriculture in China.