The Research On The Dynamic Financial Analysis Approach For Determining Capital Adequacy For Non-life Insurance Companies

Non-life insurers, with its function in risk diversification and society stabilization, play an important role in market economy. But all these should be based on a premise that the company has adequate solvency to meet the policyholders'claim demand. When encountered with unexpected losses capital is the backup of the insurer to protect them from risks. So how to decide the number of capital is one of the core problems in risk management of a non-life insurer. However it is not the fact that the more capital the better because on one hand the capital has its own cost, on the other hand the marginal revenue will decrease when raising capital reach a certain point. Consequently, in theory every company would have an optimal capital structure and capital amount. This paper takes advantage of the DFA model which is widely used among foreign companies and tries to calculate the capital amount of a non-life insurer. DFA is an Asset-Liability management tool mainly used for non-life insurers. It uses stochastic simulation so that insurance companies can make future assessment under many circumstances and can also react to any different strategies. In this paper realistic data of a non-life insurer has been used to build a DFA model that is fit for Chinese market. Then capital adequacy has been measured by using a great deal of simulations.This paper expounds the concept of capital at first, discusses some risk measures and picks up the tail conditional expectation (TCE) which is a coherence risk measure. On this basis the paper introduces the TCE capital adequacy calculation methods. Then a DFA model is established and parameterized. On the basis of fitting test to observe the model's availability in Chinese insurance market, a large number simulation data and graphs have been used to analyze current operation situation of the non-life insurer and calculate the capital which will be needed to maintain solvency in future five years. At last this paper make a sensitive test to observe how the change of operation circumstance influence the insurers'future financial position and capital adequacy in order to give some suggestion to the management.