The Pro-cyclicality Of Insurance Company And Counter-cyclical Solvency Regulation

The outbreak of the financial crisis has encouraged the establishment of counter-cyclical and macro-prudential management system. Basle Capital Accord III has proposed counter-cyclical policy to solve the problem of pro-cyclicality in banking system and mitigate systemic risk, which provided an important standard of supervision reform. As an essential part of financial system, insuranceindustryis pro-cyclical, so the insurance regulator has already realized the necessity of macro-prudential management system.This paper uses annual data of 18 Chinese insurance companies, constructs the panel data model,empirically exam the existence of pro-cyclicality in underwriting and investing business of insurance companies. Based on the empirical results, this paper establishes principal-agent model of solvency supervision that explains discretion manner of the regulators according to the specific macro-economicand financial situation. Focused on the EU Solvency II instructions, this paper deducted the risk-sensitive factors characteristics in calculations of capital requirement, technical provisions, and free capital, according to which summarizes pro-cyclical transmission mechanism of the solvency supervision frame. At last, according to the prudent macroeconomic policyand experience of Basel Accord â…¢, we put forward the discussion of countercyclical regulation and related problems in practice to be solved in the future.This paper combines macro and micro perspectives and tests correlation of the business-cycle of insurance company and economic-cycle of financial market. However, there arealso some shortages such as difficulties in data collection, and inadequate research content, so the conclusion requires further research.