Insurance Investment, Family Capital Growth And Poverty Trap

Poverty is a common problem for mankind. China has paid great intention to help-the-poor work and has achieved remarkable results. The number of poor people has been reduced significantly. However, risk and vulnerability are the core causes of poverty. People who have been out of poverty in the event such as an earthquake, fire, major illness may suffer significant losses, and fall into poverty again, especially the "illness" has become the new characteristics of poverty. In theory, there are many ways to cope with risks for family, and insurance is the most professional risk management methods for them. The loss compensation mechanism of Insurance can make the insured family receive economic compensation in the event of sudden losses and reduce the possibility of sudden events into poverty effectively. Based on the above reasons, this paper wishes to constructed theoretical model and numerical simulation studies to explore the relationship between the insurance investment, domestic capital accumulation and the poverty trap, in order to provide theoretical guidance for families in China to get rid of the poverty trap by insurance.This paper constructed two stochastic growth models of family capital with and without insurance mechanism respectively, defined the probability of falling into the poverty trap and computed numerically by giving specific parameters of the random distribution. This paper analyzed whether insurance can help families get rid of the poverty trap caused by major emergencies or not with the methods above. The result of the research shows that after covering insurance, the probability of falling into the poverty trap is determined by two main effects:the effect of increasing capital and the effect of insurance compensation. Richer families can reduce the probability of falling into the poverty trap by covering insurance, and the higher the insurance proportion is, the smaller the probability will be. The probability of falling into the poverty trap of poorer families after covering insurance is ambiguous. Whether the probability may reduce or not depends on the sensitive coefficient of critical capital for the premium rates. The probability of both wealthier families and poorer families will decrease with the decline of additional premium coefficient.This paper proposed several suggestions based on the conclusions of the previous, such as strengthening insurance product innovation, improving the management capacity of insurance companies, increasing the government’s policy support, guiding the balanced development of regional market, strengthening government insurance cooperative efforts, promoting insurance participation in precise poverty, guiding the healthy competition in the insurance companies, and promoting the healthy development of the insurance market.