The Optimal Analysis On The Structure Of Property&Casualty Insurance Business Based On Economic Capital Allocation

Since recovery of domestic insurance business in1980, after30years ofdevelopment, property&casualty (P&C) insurance has become an indispensable partof the national economy, providing comprehensive property protection for enterprisesand individuals. However, due to the limit of theory development and lack ofinnovation in practice as well as policies and regulations, there has been structuralproblem within the property insurance industry for a long time. The insurancecompany is special compared to other industries, not only concerns the level ofbusiness income but also attaches great importance to risk control and management.Economic capital, as a new kind of risk management tool, rapidly developed in recentyears, not only has unique advantages in risk measurement, but also provides aneffective way to risk control and value creation.This thesis discussed business restructuring and optimization of propertyinsurance companies based on the theory of economic capital allocation.First, itreviews the development of China’s property insurance market and combines withrelevant business data describing the current business structure and problems. Then, itconducts a comprehensive introduction to economic capital allocation:allocation ofeconomic capital is mainly about configuration rules and configuration methods, thearticle reviews the main configuration methods, and ultimately chose the minimumdeviation method to allocate economic capital. Theory of economic capital allocationbased, structural optimization problem is the core business of this article, riskdiversification effects arising from the economic capital allocation and return on riskadjusted capital(RAROC) gains as a decision tool. Finally, a large property insurancecompany with operating data from January2007to July2012is selected. Themeasurement and allocation of economic capital are based on loss data with eightbusiness lines chosen as variable.The business restructuring is optimized bycomparing the risk index, RAROC of the entire portfolio with those of individualline,also with the model of return-economic capital.The empirical results show that: from the perspective of risk diversification,increase engineering insurance, cargo insurance, accident insurance can spreadportfolio risk; from revenue perspective, reducing the size of the enterprise propertyinsurance and guarantee insurance portfolio can increase the level of yield per unit of economic capital; based on return-economic capital model, there are two cases:restricted and unrestricted business size, to determine the efficient frontier in order tofind the goal to achieve global optimal solution vector.