Life Insurance Company Solvency Risk And Its Regulation

During the past one or two decades, economic environment for life insurance companies has undergone considerable changes. Technology development and deregulation in the industry having made competition increasingly severe, life insurers are under tremendous pressure to create higher return for their stockholders and policyholders. With interest rates becoming fluctuating, it is much more difficult to match assets and liabilities than ever. Financial risk assumed by insurers has increased, so have the failures in the industry. This caused great concern about the adequacy of insurance solvency regulation. Insurance solvency risk and its regulation is the subject of this dissertation. Five chapters are organized to deal with different aspects of the topic. The First chapter discusses insolvency risk of life insurers. The amount of Capitals contributed by stockholders and accumulated retained earnings, the adequacy of insurance premiums, the magnitude of investment risk and underwriting risk are the four basic factors determining the solvency risk of an insurance company. The second chapter deals with fundamental issues about insurance solvency regulation. The target of solvency regulation is to reduce insurer failure, more rigorous solvency regulation helps to reduce insurance company failures, provide more protection for policyholders, but would probably cause insurance premiums to rise, and bring damages to some high yield assets markets. Therefore, insurance regulation authorities should take both the benefits and costs into account while considering what should be the appropriate acceptable bankrupt risk for insurance companies. But determining acceptable bankrupt risk is not the whole story for insurance solvency regulation, practically speaking, what抯 more important is that regulation authorities should have reasonable assurance that their 1~ estimate about the insolvency risk of specific insurer is not far from reality. Underestimated and overestimated results can both incur great losses. However, improving estimation accuracy calls for more resources to be allocated to regulation actions. So, it is another question which needs balancing consideration. The third chapter is concerned with the factors that influence insurance solvency regulation policy. The first factor is insurance market efficiency. Highly efficient insurance market can act as an invisible hand to control bankrupt risk on its own, while in less efficient market, solvency regulation is relatively more necessary. The second factor is insurance guaranty fund. The very existence of the fund could cause moral hazard, and potential consumers may loss the impetus to pay attention to the financial conditions of the insurer from which they purchase insurance policy. Under this kind of circumstances, effective solvency regulation is essential. The third and fourth factors are respectively risk propensity and internal risk control system of specific insurance company. Insurers with higher risk propensity and weak internal control system should become priorities for regulatory monitoring and inspection. The fourth chapter reviews all kinds of solvency regulation systems and measures used by USA insurance regulation authorities. Based on the conclusions drawn in previous chapters, theoretical comments have been given concerning whether the various systems and measures can make a...