| The income of a life insurance company is often consist of two parts:Underwriting income and investment income.However,due to the ferocity of market competition,the premium is often set at a very low level,as a result,investment income is crucial to life insurance company.The capital market is currently under a low interest rate environment,added with the underperformance of stock market which leads to te decline of interest in the fixed income assets.This gives a serious problem to insurance company,especially life insurance company,which is very sensitive to interest rate.Under this type of capital market,life insurance company can easily encounter fluidity problems and differential loss,seriously cripple its profitability and solvency,and face great profit model challenge.Insurance regulation in China has developed for decades,in 2016,it updated to C-ROSS supervision system.The C-ROSS system is oriented by risks,it established 3 pillars for solvency regulation,add qualitive supervision to quantitative supervision,enhanced the market constraint mechanism.C-ROSS gives life insurance company new regulation requirements to its asset allocation,set risk factor to different assets,and these can have influences to life insurance companies' investments portfolio,thus needed to be researched.In this essay I will introduce Black-Litterman model to optimize the investment portfolio of life insurance companies aiming its specialties in capital allocation,improve its investment structure,control the risk of investments in an acceptable level,raise portfolio returns,reduce capital occupancy and liquidity costs.Optimizing the asset allocation,achieving higher investment returns satisfying C-ROSS regulation for indebtedness,in order to relieve the reimbursement pressure and profit pressure of life insurance companies.I will base on C-ROSS regulation system,take low interest rate environment as a background,using historical data about stock,bond,bank deposit,alternative investment,consulting the investment preference of life insurance company,and introduce these factors to Black-Litterman model to analyse,and get the optimized investment portfolio under C-ROSS regulation.The result shows that Black-Litterman model can effectively optimize the investment portfolio of life insurance companies,raise its risk rate of return by changing asset weight.Based on the result given by Black-Litterman model,under low interest rate environment,regular income assets such as bank deposit and bonds are underperforming,life insurance companies can consider dropping its asset allocation to avoid differential loss.In addition,the specification and the result of empirical analysis shows that by the guidance of C-ROSS regulation alternative investment will become a vital part of life insurance companies' asset allocation. |
