On The Properties Of Participating Insurance Policy

With participating life insurance, policyholders can not only obtain insurance coverage, but also regularly paid dividends which give policyholders opportunity to share surplus with shareholders. In China’s insurance market, there are mainly two different ways of dividend distribution, the cash dividend and bonus participating. This paper examines the impact of two surplus appropriation schemes on the insurer’s shortfall risk and the net present value from both insurer’s and insured’s perspectives. conducted a study, the results showed that:even in the case of a fixed dividend smoothing mechanism and bonus calculation method, a different way of dividend will result in a different significant impact on the net present value of the risk profile of the insurance companies and policy holders. The result shows that: even though the surplus distribution and thus the amount of surplus is calculated the same way, the type of surplus appropriation scheme has a substantial impact on the insurer’s risk exposure and both the policyholder’s and insurer’s NPV. Two main principal-agent problems exist in the insurance company:Shareholders-manager agency relationship and shareholders-policyholders agency relationship. Coupled with prudent investment strategy participating insurance contracts give policyholders the right to share surplus with shareholders. So it can alleviate the conflicts of interest between shareholders and policyholders to some extent. On the other hand, how the participating insurance affect the shareholders-manager agency relationship? Based on agency theory, this paper discusses the mechanism that participating insurance policy may exacerbate the shareholder-manager incentive conflicts in stock insurance firms. By employing6year unbalanced panel data from2005to2010of46life insurance companies, this paper tests hypotheses regarding participating policy usage and agency cost of equity. The results demonstrate that participating policy usage has significant positive relationships with agency cost of equity and is affected by the trade-off between the mitigation of the shareholder-policyholder incentive conflicts and the exacerbation of shareholder-manager incentive conflicts.