Feasibility Analysis About Chinese Insurance Companies’ Investment In Financial Derivatives

As with the fast development of Chinese economy in recent years, the insurance industry in China has also made great achievements, such as the vast growth of premium and balance of available funds to invest. Therefore, how to use and invest the funds in an efficient and profitable way is vitally important to the insurers now. The Chinese Insurance Regulation Committee (CIRC) released new rules about investment in financial derivatives last October, while until now there are still no detailed trading provisions. Thus, it’s a long way to go for the insurance funds’investment in financial derivatives.Owing to the mixed risks confronted by the insurance funds, it’s quite important for insurers to manage the risks and increase the value of the funds. VaR also known as Value at Risk is widely accepted and used by companies or groups, which means the biggest potential losses of an asset or an investment portfolio may occur in a given period and under a certain confidence level. Based on the calculation of VaR and the current use of insurance funds in China, this paper discussed about how to apply VaR method in risk management.There are total six chapters in this paper.The first part introduces the background, research purpose and literature review; then presents the research questions and methodology, also points out the innovations and shortages of this paper. Underwriting and investment are the major businesses of an insurance company, but when the gross premium is increasing greatly, then how to use the available insurance funds is attracting more and more attention. From risk avoiding and hedging purpose, this paper focuses on the research of feasibility analysis of insurance funds’investment in financial derivatives, which has great practical significance.The second part describes the relevant theories about insurance funds’ investment in financial derivatives. Firstly, this paper gives the definition, categories and some special characteristics about financial derivatives, and then followed by the discussion of compositions, sources and investing principles about insurance funds. Additionally, through the theory of asset liability management and capital asset pricing model, the safety and practical background of insurance funds’ investment in financial derivatives has been further analyzed.The third part focuses on comparative analysis. In this paper, United States, United Kingdom and Japan have been chosen as the representatives of developed insurance countries. By profoundly analyzing the insurance investment portfolio status and the relevant regulations about investment in financial derivatives in these developed countries, the rest of this chapter put forward the useful experiences and enlightenments for the domestic insurance funds’investment.The fourth part identifies the current issues of insurance funds’investment in China, such as the unreasonable investment structure, low rate of return, mismatching asset and liability and so on. Then this research further demonstrates the necessity and safety of Chinese insurance funds’ investment in financial derivatives.The fifth chapter mainly calculates the VaR under two different situations and concludes that by investing in financial derivatives the total risks of the asset portfolio has been decreased. The first part of this chapter shows all the probable risks that may come up by investing in derivatives. Then based on the theory of VaR, some assumptions have been made about the asset portfolio in order to simplify the calculation. For instance, Hushen300index is used as the substitute variable for derivatives and the investment percentage is supposed as3%. Therefore, the portfolio VaR and individual component VaR are calculated by using Excel and Eviews software, which clearly shows that investing in financial derivatives does reduce the whole risks of the portfolio. However, as one of the many statistical methods, VaR also has some inevitable drawbacks; therefore, the calculation results can only be taken as references when making any investment decision.Finally, the last part of this paper gives several suggestions about investing in financial derivatives from different angles. On one hand, the insurance company must have fully demonstration about whether to invest in derivatives or not and prepare well to avoid some risks. Meanwhile, improving the level of internal management is more important. To manage the risks, they must have relevant investment management system and regulations, professional and experienced talents and so on. On the other hand, the regulation department must follow the international trend and fast changes of the macro-economic and investment environment to supervise the insurance companies and make proper decisions in a more efficient way. Last but not least, the government must create better and fair investment condition and build a better financial derivatives market system gradually so as to attract the insurance funds to invest.