Risk Analysis Of Negative Interest Rate Gap In China Life Insurance Industry

The characteristic of life insurance industry is quite different from that of non-life insurance industry. Guaranteed payment and long-term of insurance period make life insurance require long-term development, not only satisfied with the prosperous look of current situation. China life insurance started from the 1980's. Reviewing its development in the past three decades, there are achievements as well as difficulties. The rapid growth of insurance premium and amount of the insurance companies reflects the development of china life insurance industry. However, we'd better pay more attention and to find out the potential problems hiding under the prosperity, in order to promote the healthy and sustainable development of china life industry.Drawing on the experience of 100 years history of development of insurance in other countries, we are able to avoid detours. Japan life insurance industry has once developed by leaps and bounds, meanwhile hidden crisis under the prosperity. Extortionate interest rates guarantees, special favor of the regulation department and the lower level of risk acknowledgement led to bankruptcy of many Japanese insurance companies in the new millennium. As a neighbor of Japanese, china has similar experience in the development of life insurance industry. Although the total sales of our life insurance industry are rising, life insurance companies are confronted with serious negative interest rate gap, since they have sold a great amount of policies with high interest rate guarantees. It is worthwhile to discuss how to lighten the burden of negative interest rate gap on those companies and how to learn from the bankruptcy of Japanese insurance companies.The object of this dissertation is the risk of negative interest rate gap, which would lead to the possibility of losses. During the high interest rates period, the one-year deposit rates were once up to 10.98% in china. With the debut of the related policies, interest rates kept going down to 1.98% at the lowest, which leads to the huge negative interest rate gap in those companies mainly investing agreed deposit. And this kind of risk threats directly the profitability and solvency of life insurance firms.This dissertation includes five chapters. In Chapter 1, the author defines the connotation of life insurance industry, analyzes the characteristic of this industry compared to non-life insurance industry. The profit of life insurance industry is consisted of interest rate gap, expense ratio gap and death rate gap. Based on these notions, the author uses a case to analyze the three sources of profit, which makes the analysis more perceptive and easier to understand and indicates their important effects on profit. In chapter 2, the author concerns on domestic life insurance industry. Firstly, analysis of related data reflects the rapid growth of insurance premium and amount of the insurance companies, while mirrors potential problems especially negative interest rate gap risk hiding under the prosperity. Secondly, the author analyzes the current situation of this gap, and sets a simple case applying life actuary theory. This case demonstrates the formation mechanism of negative interest rate gap. Thirdly, the author illustrates the causes of the negative gap from historical, internal management, investment asset-liability management and human resource management aspects. In chapter 3, the author reviews the history of Japan life insurance, and then primarily explains the cause of continuous bankruptcy of their life insurance companies, and suggests we should learn from their reactions and subsequent approaches to solve their problems. In chapter 4, the author summarizes destructive effects of the risk of negative interest rate gap, and also points out we should learn form their precious experiences. The contents in chapter 5 are the core of the whole dissertation. The author puts forward to the strategies of reducing the risk of negative interest rate gap. The author believes these strategies should deal with the high interest rates guarantees already existing, avoid this kind of risk in new policies, as well as try best to reduce negative interest rate gap in the existing policies through covering new policies. In this sector, the author establishes a model to analyze the trend of elasticity of reserve fund rates and interest rates in china life insurance industry. From the analysis above, the author concludes that the measures we have implemented have effectively controlled the risk of negative interest rate gap in china life insurance industry.In the first chapter, there is mixture of qualitative and quantitative analysis. The former approach is used to define negative interest rate gap, and the later approach is to study its formation mechanism. In the second and third chapter, comparative analysis is employed to vertically illustrate the trend of development of our life insurance industry, and to horizontally compare the similarity of Japan life insurance industry with china life insurance industry, which sounds alarm to us. The last chapter takes the quantitative approach which is an innovation of this dissertation. Based on the statistic data, the author measures the effectiveness of these strategies against negative interest rate gap in china life insurance industry.The lesson given by Japanese life industry shows the serious consequences of risk of negative interest rate gap, either for life insurers or for the whole insurance industry. confronted with those risks, china insurance companies need take measures concerning on products, investments, and regulation, etc. Although the deposit rates have been put up from 2004 because of domestic increasing investment, it does not mean the risk disappears. Negative interest rate gap is a dynamic problem. If the investment return rates fall again, this risk would probably reappear. Therefore, the research in this dissertation is meaningful to the healthy and stable development of china life insurance industry.