Study On The Economic Capital Of The Life Insurance Companies

On one hand, the financial crisis makes the stakeholders, regulators, insurers, and policyholders, etc, realize that the risk management is critical to increase the value of the company, and protect the benefits of policyholders. On the other hand, new insurance products, huge and complex company structure, and the volatile economic environment make the risk management of insurance companies hard and challenging. Through almost 20 years, the Economic Capital becomes the popular internal capital management framework and ERM tool in global insurance industry.Meanwhile, it is only few years since the introduction of Economic Capital in China. There are many insurers unknown to it. This dissertation will establish a bridge between the theoretical study and practical operations. It not only studies and analyzes the theory deeply, but also explore a mode and path to apply the Economic Capital to Chinese life insurance industry with the experience of leading international life companies.There are seven chapters in the dissertation.Chapter 1, Introduction.Chapter 2, the Concept of Economic Capital. We will firstly discuss the capital and solvency of insurance companies. As there are some shortcomings of the recent solvency framework, the Economic Capital would be introduced thereafter. Although it isn't just a solvency capital reflecting the risk profiles, Economic Capital is consistent with the solvency development trends as an internal capital model. Finally, in this chapter, we will give the definitions of Economic Capital from some aspects, and also compare it with some solvency frameworks, of Europe, US, and other regions.Chapter 3, the Valuation framework of Economic Capital. The valuation of Economic Capital is rather complex. There are three main steps in the valuation processes: total economic balance sheet, assessment and aggregation of risk capital, and allocation of the capital. We will analyze and study some key issues in each step, including valuation of fair value of liabilities, assessment of risk capital, and the methodologies of allocation of the capital.Chapter 4: the Roles of Economic Capital in Value Management of Life Insurers. Additionally, the Economic Capital plays an important role in the Enterprise Risk Management (ERM), it is critically useful to Assets/Liabilities Management (the replicating portfolio of liabilities), product managianent (hedging strategies of products with embedded options), and performance management (new perspective of performance framework), which would fully demonstrate the roles of Economic Capital comprehensively.Chapter 5: the International Applications of Economic Capital. As Economic Capital is very necessary and important mentioned above, the leading international insurers began to use it to some extents. We will emphasize the applications of top life insurers in Europe, US, and Canada in this chapter.Chapter 6: the Applications of Economic Capital in China. We will also summarize some practical topics, and then provide some advices and recommendations on how to apply the Economic Capital to China life insurance industry.Chapter 7: Conclusions.There are some initiatives in the dissertation: firstly, we provide a feasible framework of valuation of EC; secondly, we apply the replication portfolio to the ALM and performance management of life insurers; thirdly, we consolidate the performance framework from the value perspective; fourthly, we introduce the DFA and apply it into business planning; fifthly, we introduce the contingent capital as the supplements of EC; finally, we believe the EC is very important for Chinese life insurers, but it should be modified and amended according to the environments.