The Insurance Company Solvency Study

The insurance company solvency refers to an insurance company's fulfilling the reparation that the insurance contract arranges or the paying ability. The insurance company has unique operating risks, which differentiate it from other general enterprises. As the insurer and insured cannot match in time as for rights and obligations, the insured will lose the insurance guarantee and suffer economic losses even the contract is not due yet, once the insurance company bankrupts once it fails to pay off. This will have a substantial negative effect on the operation and stability of the whole society. Therefore the paying ability of insurance company is recognized as the core of government regulation in all counties. I work in Sichuan Insurance Regulatory Commission, the frontline of insurance regulation. Although the commission won't regulate the paying ability of insurance company as a legal person directly, it still cares about the paying abilities of branches of insurance company. That's why I have decided on this topic " THE INSURANCE COMPANY SOLVENCY STUDY". On one hand, I can apply the knowledge I gained in school to my work, and on the other hand, I can study the paying ability regulation in China systematically.The dissertation is composed of five parts. Part I, Introduction, is devoted to the background of research, the summary of literature, and the frame. China's insurance started very late, regulation measures and methods fall behind comparatively. So far, China is trying to build up a regulation system working on company governance structure and market regulation with the core of paying ability. China's solvency regulation follows the suit of European Union, so this part emphasizes the content and technological innovation of European Union.Part II makes an comparison of paying ability internationally. It introduces the characteristics of paying ability regulation in USA , European Union and Japan, and also makes a list of all similarities and differences among the three countries and regions. Finally, Part II also introduces the major characteristics of paying ability regulation in China, pointing out the developing directions. China is in a period opening more to the outside world by enlarging a marketplace and is seeing progressive development. The development and improvement of regulatory system should be foreseeing, based on the entire development of China's insurance since the reforming and opening. It's impossible to copy from abroad. We should refer to foreign experience, considering the business and financial condition of insurance companies in China. In that way, we can build up the regulation structure step by step that fits China's insurance business.Part III takes the paying ability regulation of non-life insurance company as priority. In China, it is legally required to separate property insurance and life insurance, so we have non-life insurance company and life insurance. Factorings affecting the paying ability of non-life insurance company include legal capital, insurance caution money, insurance liability reserve, minimum solvency margin. This part mainly studies minimum solvency margins and non-life insurance reserves. The minimum solvency margin is the capital requirement for insurance continuity set by regulatory authorities. This dissertation compares the rules in China, European Union as well as USA Utah State. It works out the minimum solvency margins of 12 companies based on those rules. (2003) It is proved that China has a lower requirement for minimum solvency margin. Non-life insurance loss reserve is set for unfulfilled responsibility for insurance companies, which include not due responsibility reserve, outstanding reparation reserve and other responsibility reserves. This dissertation analyzed the percentages of reserves to premium of three large companies on Dec. 12, 2003, and studies the influence of reserves over paying ability.Part IV focuses on paying ability of life insurance company. Life insurance company is a economic entity that manages distinctive risk. Being the prerequisite, sustained solvency determines the survival or dissolution of the business. There are many factors affecting solvency of life insurance many. This dissertation mainly discusses assets/liabilities management and capital adequacy ratio. Life insurance company's assets and liabilities are very unique. It is vital for life insurance company to have high solvency and make sure assets could be matched with liabilities in the future. Life insurance company's paying ability is consistent with broad entity capital. Insurance regulation commission also supervises the capital adequacy of life insurance company. This chapter has introduced static testing and dynamic testing on paying ability, and the former is presently used in China.Part V proposes suggestions to improve paying ability of insurance companies. The highest risk of insurance is solvency risk. So to reinforce the solvency inspection is to ensure successful operation and development of and to protect the interest of policy holders. China insurance regulation organization takes solvency as the priority. The present paying ability regulation is built based on European Union system. So on one hand, we are to learn from European Union's theory and practice , and on the other hand we can't accept the system that is unsuitable for Chinese reality. We will also learn advanced experience from USA , Japan ,and so on to build insurance regulation system for China specifically. First, we need to solve the problem of paying ability and reserve revaluation. And then, we will build and improve internal risk management, especially assets liability management for insurance. Third, we are to facilitate the development of insurance accounting. Fourth, we are to support insurance company valuation and promote the risk control ability of insurance company through market forces.