A Research On Asset Liability Management In China’s Property And Casualty Insurance Company

Along with the rapid development of China’s economy,China’s insurance industry has grown rapidly,behind which is the intensified competition,homogenization of competition strategy,and weak capability of asset liability management(ALM)within the Property and Casualty(P&C)insurance industry.Meanwhile,in recent years,both frequent catastrophe and high volatility of capital market has increased P&C insurance company’s profit fluctuations.To enhance its industry supervision,China Insurance Regulatory Commission(CIRC)formally implemented the China Risk Oriented Solvency System(CROSS).The study of how this major regulatory shift has influenced P&C insurance company’s ALM and how to build up a new ALM framework has a great theoretical and practical significance for both the insurance industry and P&C insurance company.With the author’s years of experience,this paper starts with analysis of solvency supervision and ends with how the regulatory shift has influenced P&C insurance company’s ALM and their coping strategy with the method and theory of Economics and Finance.By using theoretical analysis,comparative and empirical analysis,this paper illustrates the interactive game relationship between solvency regulation and insurance company,how dynamic solvency regulation has influenced P&C insurance company’s ALM,analyzes CROSS’s influence on China’s P&C insurance company’s ALM,constructs China’s P&C insurance company’s ALM framework under CROSS and offers a few suggestions for CROSS and for P&C insurance company to improve its ALM.This paper has seven chapters and the major conclusion is as the following:1 Solvency regulation system is essentially designed to influence insurance company’s capital management and risk management.The global solvency regulation system has experienced the development from static solvency regulation to dynamic solvency supervision.The dynamic solvency regulation can basically reflect the relationship between the capital and the risk of the insurance company.The implementation of dynamic solvency regulation system of insurance company will result in the change of regulatory capital calculation,the corresponding relationship among actual capital,economic capital and regulatory capital,and ultimately lead to the adjustment of the insurance company’s asset allocation,capital management strategy,business development strategy and risk management etc.2 The interactive game between insurance companies and regulators constitutes the main theme of solvency regulation.Under the dynamic solvency regulation,P&C insurance company needs to consider many factors for ALM.During the transition period from static solvency to dynamic solvency regulation system,asset allocation to open market equity,real estate and other high risk assets depends on the company’s solvency adequacy ratio,investment ability,and investment strategy.Solvency regulation shift can also change P&C insurance company’s product,sales channels and business structure.3 Implementation of CROSS will bring huge impacts on P&C insurance company’s ALM.Firstly,liquidity management has become an important task of investment management of insurance companies.For whole industry,insurance companies will increase the proportion of unlisted equity and the equity method of accounting assets instead of open market equity based on their capital strength due to weighted basic risk factor of unlisted equity less than that of listed equity under CROSS.The company with high solvency ratio and good investment management ability may take the high risk and high return strategy.According to the result of Model,the impact on insurance company’s asset allocation depends on solvency adequency.And the solvency adequency has positive correlation with high risk ratio in the asset allocation;Secondly,The new solvency regulation system will guide the adjustment of business structure and customized development strategy for insurance companies,which encourage the insurance companies to consider the asset allocation strategy and business development,pay attention to the assets and liabilities to achieve balanced development;Thirdly,the CROSS is helpful to improve the capital management of P&C insurance companies,to maintain a reasonable growth rate,the trade-off between risk and revenue capabilities,so as to achieve reasonable growth;helps insurance companies establish and improve the system of risk preference,encourages insurance companies enhancing their risk management ability to realize internal potential to reduce the minimum capital requirement,so as to improve the capital efficiency and operating efficiency;promotes investment management transition from extensive management to intensive management and improves investment performance evaluation.4 Under CROSS,the core issue of P&C insurance company’s ALM is asset allocation.With maximum of profit as its goal,Effective ALM framework should be centered on asset allocation model,in which these factors,such as regulation,solvency restraint,liquidity requirement,risk appetite,rating etc.should all be embedded with mathematical inequality.As to CROSS’s restraint,asset allocation model can be embedded with market risk and credit risk’s minimum capital requirement by using nonlinear equation.In addition,P&C insurance company should construct an distri`bution mechanism for liquidity,solvency,risk limits and rating,at the same time set up a special department responsible for the company’s asset liability management.P&C insurance company also needs to dynamically trace the regulation on investment,expected risk and return of capital market,its own underwriting situation,including retaining premium amount,reserve for outstanding claim after reinsurance,combined ratio,total sum insured of CAT risk etc.to promptly adjust its asset allocation when the above factors change.5 Under the restraint of CROSS,mean variance model is suitable for P&C insurance companies’ asset liability management.Based on internal management data of a medium-sized insurance company and historical data of relevant indices,with the compares of the two traditional models,it has been found that in the current regulatory environment the mean variance model other than the risk parity model is more suitable for the management of assets and liabilities of P&C insurance companies.At present,China’s regulatory constraints limit the asset allocation of insurance companies,because of the limitation of P&C companies in China,the investment return from optimal asset allocation is significantly higher than the average return from the optimal asset allocation without any constraint.At the same time,also significantly enlarge the combination of volatility.This paper has some innovative and contributing points in these below aspects:1 This paper explains internal reason of solvency regulation system development,studies the game interactive relationship and mechanism of the solvency regulation system changes and P&C insurance companies in developed countries.2 Using theoretical,comparative and normative analysis,this paper discusses how CROSS has affected P&C insurance companies’ ALM.Based on asset allocation model,this paper builds up China’s P&C insurance companies’ ALM framework under CROSS,explores the new method for dynamic ALM under the CROSS constraints.3 This paper embeds solvency constraints into the asset allocation model through allocation scheme,with respect to the first pillar and the second pillar’s minimum capital requirement of CROSS.By monitoring the investment ratio of regulatory restrictions,solvency constraints and risk tolerance constraints,this paper found out the suitability of risk parity model for China’s P&C insurance companies’ ALM.There are some deficiencies in this paper.For example,due to China’s current capital market and lack of industry data,the use of some models has been limited.With the continuous development of China’s insurance industry,the improvement of management of insurance companies,and the accumulation of relevant data,it is necessary to further explore the applicability of Dynamic Financial Analysis(DFA)and stochastic programming method for ALM under the new solvency regulation.In addition,due to limited data and space,this paper’s comparative research part mainly focuses on the analysis of the solvency regulation system in the dynamic impact on asset liability management for insurance companies on the results,while its influence on different countries needs to be combined with each country’s own condition.