Research On Underwriting Strategy Of Property Insurance Company Based On ERM

There is no unified and clear definition of underwriting strategy in the existing research.The original meaning of strategy is the set of solutions that can achieve the goal.In this paper,"underwriting strategy" is defined as a set of development plans to achieve underwriting business objectives.Underwriting strategy includes two important contents: strategic objective and development plan.According to the different profit objectives,underwriting strategies can be divided into "mountain type" strategy and "sea type" strategy." mountain type " strategy requires underwriting business to be profitable,while " sea type " strategy allows underwriting business to produce certain losses.Development plan refers to the operation and management plan of underwriting business that the company can choose in order to realize the underwriting strategy target.According to the different implementation links,the development plan can be divided into pricing strategy,business strategy,management strategy,etc.In the past 10 years,China's insurance market has maintained a high-speed and stable development,the growth rate of premium income is stable,the product types are gradually diversified,and the protection level continues to improve.In 2020,the original premium income of property insurance will reach 1.36 trillion yuan,an increase of 56.8 billion yuan compared with that in 2019,with an increase rate of 4.36%.Compared with the early highspeed growth,the premium growth of property insurance is relatively stable in recent years,the growth rate is decreasing year by year,and fluctuates around 10%.Affected by the epidemic situation,the premium growth rate will decline in 2020.As the pillar business of property insurance companies,the proportion of auto insurance continues to decrease,and non auto insurance business has gradually become the main driving force for the premium growth of property insurance companies.At present,the operation situation of property insurance companies in China is not optimistic.From 2010 to 2018,only 18 property insurance companies have achieved double profits in underwriting and investment,and the remaining 68 companies are in a state of loss.The net profit of property insurance industry fluctuates greatly.In the early stage of the development of China's insurance industry,insurance companies take the way of rapid expansion,hoping to occupy more market share,and the premium income has maintained a super rapid growth.Benefited from the rapid development of China's social economy in the same period,the insurance company has higher investment income,which makes up for the loss of underwriting business and enables the company to continue to operate.At present,China's social economy has ended nearly 20 years of rapid growth,economic development has entered the "new normal stage",GDP growth and economic benefits are gradually decreasing,investment downward pressure makes the profitability and profitability of investment business have changed,and there is great uncertainty in the business model of relying on investment income to make up for underwriting losses,so insurance companies need to review According to the existing underwriting strategy,adjust the current extensive operation mode in time.he choice of underwriting strategy is about the balance of risk and benefit.Insurance companies should explore new healthy and sustainable profit model and underwriting strategy under the premise of steady operation.Should underwriting be profitable? How to realize underwriting profit? This paper hopes to solve the above problems on the basis of a comprehensive review of risk and performance in combination with the international advanced comprehensive risk management theory.Enterprise risk management(ERM)theory originated at the end of the 20 th century.After more than 30 years of development,it has become one of the most advanced risk management theories in the world,and has been widely recognized and used by banking,insurance,securities and other industries.As the latest development direction of risk management,comprehensive risk management manages the comprehensive risks faced by enterprises through the way of full participation and whole process prevention.All levels of enterprises participate in the risk management for all aspects of enterprise operation and management by using a variety of methods,so as to ensure the completion of enterprise operation and management objectives.Hoyt and Liebenberg(2009)used the data of insurance companies,selected Tobin Q as the performance evaluation index to study the relationship between comprehensive risk management and corporate performance.The results show that the implementation of comprehensive risk management helps to improve corporate performance.Xue Linlin(2012)took property insurance company as the research object,analyzed the current situation of risk management in property insurance company,elaborated the necessity and feasibility of implementing comprehensive risk management in property insurance company,and gave specific suggestions based on eight elements of comprehensive risk management.At present,there are few researches on the underwriting strategy of property insurance companies,and the main research contents focus on the profit model,profitability and corporate performance.Charumathi(2012)empirically studied the factors influencing the profitability of Indian insurance companies.The results show that the retained premium is positively correlated with the profitability,the amount of equity capital is negatively correlated with the profitability,and the underwriting risk is not correlated with the profitability.Zhao Guiqin et al.(2013)used Du Pont analysis system to conduct an empirical study on the financial data of China's property insurance companies from 2007 to 2011.The results show that the profit level of China's property insurance companies is unbalanced,different scales of insurance companies apply different profit models,the property insurance industry relies too much on investment business,and the profit fluctuates greatly.It is necessary to balance the importance of underwriting and investment,and turn to professional operation.The existing research on the selection of profitability indicators of property insurance companies is relatively limited.They mostly use the return on assets or return on capital indicators,which only consider the absolute profitability and ignore the risk.They only measure the profitability at a certain point and ignore the stability of profitability.It is not conducive to the long-term healthy development of the company,and there is no effective way to choose the profit model suggestions.Based on the Enterprise Risk Management theory,this paper measures the investment risk,underwriting risk and overall risk of property insurance companies,constructs RAROC underwriting decision model,scientifically and systematically models the business process of property insurance companies,selects appropriate decision-making indicators,and makes underwriting strategy decision by using mathematical model,which makes up for the theoretical research gap.At the same time,this paper uses the historical data of property insurance companies for empirical research,which has strong practical significance and provides reliable suggestions for property insurance companies to improve their profitability.In order to solve the problem of underwriting strategy selection of property insurance companies,this paper discusses in the order of theoretical basis,operation status and risk measurement of property insurance companies,underwriting strategy target selection based on ERM,pricing strategy model based on ERM,and the influence of operation and management strategy on underwriting profit margin.The first chapter is the introduction,combined with the reality of the insurance industry background and macroeconomic background,expounds the significance of the topic.This paper summarizes the literature on comprehensive risk management,profit model of insurance companies,profitability and performance of property insurance companies,and forms the research ideas and research framework of this paper.Chapter 2 is the theoretical basis.It introduces the connotation of underwriting strategy,the definition,characteristics,framework system,core concepts,development process of ERM theory,as well as the basic principle and Actuarial Model of insurance product pricing.It expounds the reasons for choosing ERM theory as the breakthrough point to study underwriting strategy,which provides a theoretical basis for establishing mathematical model and conducting empirical research.Chapter 3 analyzes the current situation of property insurance companies and measures the risks.It describes the opportunities and challenges faced by property insurance companies from four aspects of asset scale,operation status,risk management and industry development.It uses GARCH model to calculate the VaR value of return on various assets of investment business,and uses kernel density estimation and Monte Carlo simulation to calculate the VaR value of loss ratio of underwriting business The risks faced by insurance companies provide factual basis for the selection of underwriting strategy objectives.In Chapter 4,the aim of underwriting strategy is selected based on ERM theory.This paper measures and analyzes ERM core indicators of property insurance companies,takes 64 property insurance companies in China as samples,uses tailvar method to measure the overall risk of insurance companies,estimates the amount of economic capital and RAROC that each property insurance company should have,and carries out random effect panel regression analysis on the factors influencing RAROC of property insurance companies,and investigates the relationship between underwriting profit margin and RAROC,so as to provide reference for underwriting strategy This paper provides empirical basis for the selection of bidding documents.Chapter 5 constructs the pricing strategy model based on ERM,selects RAROC as the index to measure the operating performance of property insurance companies and the basis for formulating underwriting strategy,models the economic capital and net profit of the company with reference to the economic capital model and DFA model,constructs the RAROC pricing strategy model,and determines the best expected profit rate and additional expense rate by maximizing RAROC,so as to provide reference for property insurance companies The company provides a new method for pricing strategy selection.Chapter 6 studies the influence of different operation and management strategies on underwriting profit margin,and uses fixed effect model to make regression analysis on the factors influencing underwriting profit margin,so as to find the development scheme that is conducive to improving underwriting profit margin,and provide feasible suggestions for property insurance companies to choose operation and management strategies.Chapter 7 summarizes the previous theoretical and empirical results,and gives reasonable suggestions for the future underwriting strategy and operation mode of property insurance companies.The research methods used in this paper include literature research,induction,mathematical modeling,empirical research and comparative analysis.By collecting and sorting the domestic and foreign literature on comprehensive risk management,profit model and profitability of insurance companies,performance evaluation and improvement of insurance companies,combing the research results and advantages and disadvantages of existing literature,this paper establishes the research framework of the article,and studies the underwriting strategy of property insurance companies.This paper summarizes the information collected from the literature and data,summarizes the current situation of the insurance industry,macroeconomic situation and investment environment,and forms the research background of this paper.In addition,it also summarizes different risk measurement methods,and finally selects tailvar method to calculate economic capital.Referring to the economic capital model and the dynamic financial analysis model,combined with the actuarial non life insurance pricing method,this paper models the economic capital,the net profit of the property insurance company and the RAROC of the property insurance company,so as to build the underwriting decision model based on ERM.Using the historical data of property insurance companies,GARCH model is used to measure the risk of each investment asset,kernel density estimation and Monte Carlo simulation are used to measure the TVAR value,economic capital and RAROC of each company,stochastic effect model is used to make regression analysis on the influencing factors of RAROC,and fixed effect model is used to make regression analysis on the influencing factors of underwriting profit rate.Before the empirical research,the paper compares and analyzes the empirical methods,selected indicators and selected models,so as to select reasonable methods,suitable indicators and models for research.After the empirical study,the results of horizontal and vertical comparative analysis,get accurate conclusions.Finally,the following conclusions are obtained:1.Underwriting strategy objective: the property insurance company should choose the "shanpai" strategy and require the underwriting business to be profitable.From a practical point of view,in recent years,the scale of total assets of property insurance companies has been declining continuously,and the net profit of the industry fluctuates sharply,which mainly depends on investment business to drive the company's profit level.The operating results of investment business of property insurance companies are greatly affected by the financial market environment.China has entered a sustained low interest rate environment.Since 2008,the interest rate risk has increased significantly.The stock market is significantly affected by the policy and fluctuates violently.The bond market showed a narrow fluctuation pattern,with a substantial increase in the issuance,a slight decrease in the yield,and a decrease in the bond price index first and then an increase.When VaR value is used to measure the risk of all kinds of investment assets,under the same confidence level,the risk of stocks is the biggest,followed by funds,the third is bank deposits,and the risk of national debt and corporate bonds is relatively small.The risk level of bank deposits is relatively stable.The risk level of stocks and funds fluctuates violently in the long term and short term.The risk level of treasury bonds shows the characteristics of long-term stable short-term fluctuations.The risk level of corporate bonds shows an obvious upward trend.The overall investment downward pressure is large,the investment environment is grim,and the risk is difficult to control.The underwriting risk is relatively stable,and the 99% probability of underwriting loss ratio is less than 58.29%.Based on the above facts,property insurance companies should choose the "shanpai" strategy to underwrite,adopt a two wheel drive profit model,require the underwriting business to achieve profitability,and avoid the overall risk of the company due to too much reliance on investment business.From the empirical level,by measuring and comparing the TVAR value,the proportion of economic capital and RAROC of each company,we can find that the risk situation of property insurance companies in China is quite different,most of them are in the medium risk level,and some of them are worrying.Empirical analysis of the factors affecting RAROC shows that underwriting profit rate and return on investment have a significant positive impact on RAROC,premium growth rate has a significant negative impact on RAROC,and asset growth rate has no significant impact.The rapid growth of premium scale will increase the risk of the company,which is not conducive to the healthy development of underwriting business and the company as a whole.Property insurance companies should choose the "mountain group" underwriting strategy,not blindly pursue premium growth,and strive to improve the underwriting profit margin,which is conducive to improving the company's profitability in the face of risks.2.Pricing strategy: the best expected underwriting profit rate and premium rate can be determined by building RAROC pricing strategy model.At present,the basis of decision-making is profit maximization,shareholder wealth maximization,enterprise value maximization,or stakeholder benefit maximization.But all kinds of goals have their own shortcomings.The goal of profit maximization does not consider the time value and risk factors of funds,which is a short-sighted goal.The maximization of shareholders' wealth only emphasizes the interests of shareholders and ignores the interests of stakeholders,which is not applicable to non listed companies.The operability of enterprise value maximization is low,so it is difficult to accurately measure the market value of enterprises.Maximizing the interests of stakeholders is a multi-level comprehensive goal,which is also lack of maneuverability.Comprehensive risk management fully considers the multiple risks of integrated market and the correlation between risks,forms a target system including strategic objectives,business objectives,reporting objectives and compliance objectives,integrates performance appraisal and risk management,quantifies risks through VAR model,and converts risks into required capital by using the concept of economic capital,finally forms RAROC Index,which can be combined with the risk status of the company to examine the rate of return on capital,can be used for risk management and performance evaluation at the same time,and is a reasonable basis for the company to make business decisions.Maximizing RAROC can be a new method for property insurance companies to make underwriting decisions.This paper selects RAROC as the index to measure the operating performance of property insurance companies and the basis for formulating underwriting strategies.It models the economic capital and the company's net profit with reference to the economic capital model and DFA model,and then constructs the maximum RAROC model.By maximizing the RAROC,we can find the best expected underwriting profit rate and return on investment.The results of the model are influenced by the deterministic constraints such as laws and regulations,as well as the three stochastic constraints of underwriting risk,investment risk and overall risk.3.Business strategy and management strategy: it is necessary to formulate targeted underwriting strategy according to the size of the company.Different scale property insurance companies have different factors that affect their underwriting profit margin.Only by making targeted underwriting strategies according to the scale of the company can the underwriting profit margin be effectively improved.Through the analysis of the factors affecting the underwriting profit margin of large,medium and small property insurance companies,it is found that each factor has different effects on companies of different sizes.Earned premium has a positive impact on the underwriting profit margin of companies of all sizes,with the largest impact on small companies,followed by medium-sized companies,and the smallest impact on large companies.Net assets only have a positive impact on medium-sized property insurance companies.The regional entropy has no significant effect on the underwriting profit margin of companies of all sizes.Insurance entropy has a slight negative impact on large companies,a greater positive impact on small companies,but no significant impact on medium-sized companies.Economic capital has a negative impact on the underwriting profit margin of companies of all sizes,with the largest impact on small companies,followed by medium-sized companies,and the smallest impact on large companies.Solvency adequacy ratio only has a negative impact on large companies.For large companies,expanding the scale of premium can improve the underwriting profit margin,but expanding the scale of assets is not effective.Regional expansion strategy is ineffective to improve the underwriting profit margin,and investing too much cost and energy to develop new products will reduce the profitability.Risk management factors have a negative impact on the increase of underwriting profit margin,because large property insurance companies have stable operation,strong risk management ability,and higher economic capital or solvency adequacy ratio represents more idle capital,which will lead to lower profitability.To sum up,in terms of competitive strategy,large companies should adopt premium expansion plan instead of asset expansion plan;in terms of marketing strategy,they should adopt professional operation plan instead of product diversification plan or regional expansion plan;in terms of risk management strategy,they should adopt economic capital management plan,and generally they can choose more aggressive underwriting strategy.For medium-sized companies,expanding the scale is the best way to improve the underwriting profit margin.Both premium scale and asset scale have a significant positive impact on underwriting profit margin.To expand the scale of premium,we can choose either regional expansion strategy or product diversification strategy,both of which have no significant impact on profitability.No matter which strategy we choose,it is feasible as long as we can achieve the effect of increasing premium income.Economic capital has a small negative impact on underwriting profit margin,while solvency adequacy ratio has no obvious impact,which indicates that medium-sized property insurance companies can choose aggressive underwriting strategy appropriately under the condition of ensuring risk management up to standard.To sum up,medium-sized property insurance companies should adopt the combination of premium expansion scheme and asset expansion scheme,and adopt economic capital management scheme to improve the underwriting profit margin.For small companies,increasing earned premiums can significantly improve underwriting margins.On the other hand,because of its small asset scale,the impact of increasing net assets on profitability is not significant.The choice of product diversification strategy can kill two birds with one stone,which not only increases the premium scale,but also improves the underwriting profit margin.Small companies are not suitable to spend energy on regional expansion,the effect is not significant.In the aspect of risk management,it is enough to ensure the compliance of solvency adequacy ratio.What we need to pay attention to is the management of economic capital.Improving our ability to resist unexpected risks is conducive to improving the underwriting profit margin.To sum up,small property insurance companies should choose the combination of premium expansion scheme and product diversification scheme,and adopt economic capital management scheme to improve the underwriting profit margin.