Economic Capital、fair Value And Property&Casualty Insurance Company Risk Management

Economic capital concept has got rapid development ever since it appeared, and has been widely applied in the field of commercial banks which proved its important role in risk management. For insurance companies, economic capital is a new concept of risk management. Especially for P&C insurance companies, there are not much successful experiences for reference. But under the background of financial business’s mixture and the economic globalization, economic capital in the financial industry’s widespread popularization is an inevitable trend. As a kind of advanced risk management techniques, economic capital can realize effective integration of risk and capital which has great significance for improving the level of risk management of insurance companies. Meanwhile, by introducing a risk adjusted return on capital (RAROC), the insurance business performance can be effectively evaluated, which will further improve the level of risk prevention.At the same time, the trend of global economic integration intensified in the last ten years, and the2008worldwide outbreak of the financial crisis made people realize the importance of fair value measurement attributes. Some major international accounting organizations have introduced the corresponding accounting rules one after another, requiring all financial enterprises should evaluate the assets and liabilities at fair value. Our country also has followed the international pace, making corresponding request for fair value measurement. But there are essentially difference between property insurance business and other industries. Its debt has particularity. There are some difficulties to introduce the fair value measurement attributes in the assessment of property insurance liabilities. This paper tries to provide an effective method for insurance enterprise liabilities assessment, and points out that fair value measurement is an important precondition for insurance enterprise’s economic capital evaluation. And in this way the economic capital will be integrated with the fair value measurement attribute, hoping to offer help for the construction of insurance enterprise risk management framework.Chapter one briefly clarifies the background and significance of this paper and recalls the domestic and foreign situation in the relevant areas of research. Finally this chapter points out the innovation of this paper.Chapter two mainly points out the importance of economic capital for P&C insurance company risk management process. Firstly, the risk that insurance companies are facing was classified according to the classification of the International Actuarial Association (IAA). And then this chapter briefly introduces risk management tools for P&C insurance companies and put forward the concept of economic capital, pointing out that the role of economic capital in the P&C insurance company’s risk management.Chapter three points out that economic capital can play an important role in risk management of property&casualty insurance only when its assets and liabilities are carried at fair value assessment at the same time. This chapter begins with a brief introduction on the advantages and disadvantages of the fair value measurement attributes, and then explores the assessment of the fair value of the P&C insurance company liabilities. And the net present value method is selected as the correct way to assess property&casualty insurance liabilities at fair value. At last, this chapter applies fair value into economic capital assessment to provide a new idea for the P&C insurance company risk management.Chapter four mainly discusses the specific application of the economic capital in the P&C insurance company’s risk management practices. First of all it points out that the asset-liability management is the basic idea of the risk management of the P&C insurance company, and divides insurance companies profit sources into two major functions of the center, Underwriting and Investment Center. Then this chapter links these two centers using the transfer price concept in management control system, and finally evaluates the two centers on economic capital and performance management.Chapter five illustrates how to evaluate the economic capital of P&C insurance company under the fair value assessment through a case study. Through this way this chapter verifies the link between economic capital and fair value, as well as their role in risk management of P&C insurance company. Finally according to the result of the case study, this chapter puts forward related suggestions for P&C insurance company’s economic capital management under the fair value measurement model.