Factors That Affect Life Insurance Industry Essay Example
Factors That Affect Life Insurance Industry Essay Example

Factors That Affect Life Insurance Industry Essay Example

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  • Pages: 10 (2513 words)
  • Published: May 16, 2018
  • Type: Article
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Firstly, life insurance industry can alp ensure the normal people's life. Second, life insurance collects idle capital in society and increases financial revenues.

Third, life insurance industry fixed overall unemployment and underemployment problems. In developed countries such as America, there are approximately 200 million insurance officers-?more than 1 percent of the population. Even in China, the amount of insurance agents has reached the number of 300 million and most of them are for the insurance.

The realization of the life insurance industry contributing to the development of the national economy is based on keeping the steady evolving state of this industry. However, to realize the steady development of life insurance industry, it requires the sufficient solvency and it's crucial to a life insurance company.

If the solvency of a life insurance company cannot

...

reach the minimum requirement and is unable to pay for the amount of claim payment and it makes to the policyholders suffer unexpected losses, which will eventually lead to the huge potential risk of the social stability.

Therefore, it makes perfect sense to guarantee the claim-paying ability (as the same meaning Of solvency) Of life insurance industry. TO achieve the goal, this article conducts research on the factors that are affecting the solvency of life insurance companies by separating them into qualitative and quantitative aspects, including internal and external factors, and in conclusion we make suggestions to improve solvency. 1. 2 Basic Framework and Methodology 1.

2. Basic Framework There are 4 major parts of this article: literature review and introduction to the basic theory of the solvency, qualitative analysis of internal and external factors that affecting solvency of life insuranc

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company, quantitative analysis f external factors that affecting solvency of life insurance company and suggestions to the improvement of solvency of Chinese life insurance companies. Introduction introduces the background, meaning Of the study, logical framework, methodology and creativity and weakness of the article.

Literature review summarizes the literature review at home and abroad. The foreign literature includes three aspects: study on determination of the minimum solvency margin, study on the internal factors that are affecting solvency and study on the external factors that are affecting solvency of insurance companies.

In the introduction of basic theory of solvency part, it introduces the concept of solvency. The part of Quantitative analysis on factors that are affecting solvency of Chinese life insurance companies conducts research on the internal and external factors that affecting the solvency.

Internal factors includes the asset class factor, liability class factor, operation and management ability class factor, and scale factor. External factors includes: macroeconomic situation, inflation rate, interest rate and relevant laws and regulations.

12. 2 Methodology Among the studies of the factors affecting solvency of life insurance company, domestic studies are mostly aimed at the quantitative analysis and few on the qualitative analysis. However, in this article We combined the qualitative and quantitative analysis and in the quantitative analysis we use the regression model. . 1 Foreign Literature Review 2. 1.

1 Study on Determination of the Minimum Solvency Margin Champagne (1961 ) defined the solvency margin as the net assets that assets exceed its liability. He determined the solvency margin based on the ruin theory and built up function relation between related factors. He got the accurate number of minimum amount of

solvency according to this model. Démodé (1963) proposed radical new solvency margin based on the effort Of Champagne-?gross premium, amount of claim payment and reserve fund.

He assumed that the minimum solvency margin should be the maximum value among 1 9 percent of the reserve fund, 34 percent of the average amount of claim payment and reserve fund of recent 2 years, and 24 percent of the gross premium. G.

E. Pinches and Reaching. J. S (1973) determined the solvency margin by applying the multi-variables identification analysis.

Easterlies & Dewitt (1980) constructed a ratio model, which is beta distribution to determine solvency margins. It must satisfy that the sum of the claim payment cannot be larger than the total gross premium.

GIS (1983) thought that the solvency margin was composed of five parts: claim volatility, probability of asset devaluation, underwriting risk, reinsurance risk and other risk. They constructed a solvency model by quantizing these risks.

The survey on the internal factors begins with the forecasting of the insurance company's solvency. Experts forecasted it by analyzing some uncial indicators and however, the financial indicators refer to the premium revenue growth rate, profit growth rate, liquidity of assets, company operation, company scale and underwriting situation.

Gunmetal's research (1995) shows that a relatively rapid premium revenue growth indicates the high approbation degree of an insurance company though, it causes the weakness of solvency. Asset Operation Ability: the research from Gametal (1995) and Kramer (1996) indicates that the asset operation ability of one company has a positive correlation with its solvency. However, the income from investment plays an important role in the insurance company's earnings.

Lots of statistics illustrates

that, the stronger a company's asset operation capability, the greater the earnings.

Therefore, the company's asset operation ability has the vital practical significance in its financial situation. The Scale of Insurance Company: Bargain and Harbingers (1990), Cummins, Harrington and Klein (1995) believes that the possibility of relatively small insurance agent being stuck in crisis is greater than the big institution because the big institutions are "too big to fail".

Browne and Hoyt (1995) tested 6 external factors that are affecting solvency ND the six factors are: competition level among insurance companies, timing of implementation supervision measures (assuming at the first season every year), insurance market's underwriting circle, unexpected inflation rate, market interest rate and changes in interest rates. In their research, it indicates that the first three factors have a significant impact on the solvency and all of them have a positive correlation with the company's solvency, except the market interest rate. Browne.

M.

J and Robert E. Hoyt (1995) analyzed the effect of inadequate solvency rates from the changes in the market economy environment by sing the Logistic regression model. Browne. M. J,J.

M. Carson and RE. Hoyt (1999) applied the Poisson regression model to test the relationship between the insurance market's solvency and the current economy condition, while the economy condition contains seven components: long-term interest rate level, per-capita income level, quantity of insurance company, return rate of stock market, unemployment rate and return rate Of fixed-asset investment. . 2. 1 Domestic Literature Review Fang Us (2001) analyzed financial dates from 6 insurance companies and ranked the internal factors that affect solvency.

Most to least serious, they are reinsurance rate, liquidity ratio, gross

interest rate, investment return rate and combined ratio. Fuxin's Wang (2004) summarized the factors that affecting insurance company's solvency and these factors can be classified into internal factors and external factors. However, the external factors include economy, society, legislation and environment.

Whereas, the internal factors are split two class: into income class and expenditure class. Income class represents the premium revenue, earnings from investment and capital injection from external sources. Expenditure class stands for compensation expense, current expense and bonus issue.

Jagging Shih and Shannon Lie (2007) discovered the relationship between an insurance company's solvency and the supervision index of a company's solvency by using the Logistic regression model.

They concluded that the solvency volatility rate, quick ratio, receivable premium rate and asset recognition rate have a remarkable effect on solvency. 2. 2.

2 Domestic Literature Review Summary On account of a short period has just gone through since the resumption of business of insurance industry and the constantly changing accounting yester, there are small available sample size for quantitative analysis. Therefore, the domestic literature reviews on solvency of Chinese insurance company using quantitative analysis are limited.

In this study, we apply seven main independent variables to test their effect on the life insurance industry solvency. They are the growth rate of premium revenue, capital adequacy ratio, operating profit ratio, market share, growth domestic product, inflation rate and real interest rate. Our objective is to test whether the life insurance industry solvency is correlated with those independent variables and how those independent variables correlated to each other.

The regression model is developed as followed: Y +;l growth rate of premium revenue+ 132 capital adequacy ratio

+ 133 market share + 34 operating profit ratio + ;5 growth domestic product + 6 inflation rate +;7 real interest rate +E To see how those factors contribute to the life insurance industry solvency, detailed research of every single independent variable is required. 4. 1 Samples Selection We chose five life insurance companies as our research samples including four China-invested enterprises . They are the China Life Insurance Co.

Ltd, China Pacific insurance co. LTD, Ping An Life Insurance Company of China and New China Life Insurance Company. To analyze the factors that affect the life insurance solvency in China, these five companies can basically reflect the situation in Chinese life insurance industry. Firstly, these 4 insurance companies have long history in doing business in china, and also have better financial stability.

Secondly, According to the 2012 life insurance company ranking report, based on the market share in Chinese market, China Life Insurance Co. , Ltd, China Pacific insurance co. , LTD and Ping An Life Insurance

Company of China were the top 3 life insurance company and New China Life Insurance Company ranked the 8th. The total market share of these four companies is over 60% of the whole life insurance Chinese market. Lastly, these five companies are listed companies; it is easier to obtain the financial data from their financial statements.

4. 2 Basic Theory of Solvency Solvency also called claims-paying ability; it is the core of life insurance company's routine operation. Solvency is the ability of life insurance company that to perform the contracts' items of compensation.

Life insurance company just ensure that it has adequate solvency to protect the interest

of clients and increase the confidence of applicants.

The regulation of solvency is specific in the insurance regulatory system. There are TV'0 types of definition, one is according to the ruin theory that regard the company as solvent as long as its asset exceed liability; the other is base on the liquidity theory that only if the company can perform its current duty, it has the claims-paying ability. The standard of measuring solvency of life insurance company is the balance between the company's asset and liability in any specific date.

From different angles Of management, we can divide the solvency margin into three different forms. The first is actual solvency margin; it is the real ability of the life insurance company to pay the claims payment. The second is required solvency margin, which is the solvency margin that life insurance company should maintain in theory.

The last one is statutory solvency margin. It requires life insurance enterprises must keep the minimum solvency margin that according to the legal requirement. In our study, we chose actual solvency margin as our dependent variables. 4. 3 Internal Factors Analysis

The solvency of life insurance company is the difference between admissible asset and admissible liability. Hence, factors that can affect the admissible asset and admissible liability also may affect the solvency Of life insurance company.

In our study, we divide the internal factors into four main classes, asset class factor, liability class factor, operation and management ability class factor, and scale factor. 43. 1 Asset Class Factors The asset of life insurance company normally including stocks, bonds, financial derivatives, deposit, real estate and some other direct investments.

The volatility

of these assets will affect the value of insurance company. For instance, the price decline of stock held by the insurance company may reduce the company's asset thereby affecting its solvency.

The exchange rate has an effect on the insurance company that involving foreign investment. The volatility of exchange rate cause the decline value of foreign investments also affects the life insurance company's solvency. In general, the change value of the asset has a huge effect on the solvency of life insurance company. However, life insurance company can avoid the risks by using uncial derivatives such as option and future.

The return on investment determines the profit of life insurance company. On the condition that the life insurance company has good return on investment, the profitability will increase as well as solvency. TO the contrary, bad return on investment result in the decline on solvency. 4. 3.

2 Liability Class Factors The change of liability has huge effect on the life insurance company's solvency. The liability factors mainly include the fluctuation on claiming for compensation, the distribution of unexpired life insurance liabilities and bonus payment.

The fluctuation on claiming for compensation may causes misfit between the actual claim payments and predicts claim payments. The distribution of unexpired life insurance liabilities can affect solvency because different categories of insurance with different level of risk.

The proportion of different categories Of insurance sold by insurance company affects the different numbers of claim payments, and lead to the change of solvency. Lastly, the amount of bonus payment influence the company's profitability and cause effect on solvency. 43. 3 Operation and Management Ability Class Factor

Operation and management ability

has key effect on life insurance company's profitability and efficiency. The higher level of operation and management ability results in the higher operation efficiency and profitability, and along with improved in solvency. Firstly, to increase solvency, the life insurance company can improve employees' work efficiency to reduce spending, which require improving the management ability.

Secondly, good operation and management ability help to lower the possibility of insurance fraud, which can save the spending Of life insurance company. 43. 4 Scale Factor

The scale factor of life insurance company has effect on product development capability and capital operation, which result in the change on solvency. 4.

4 External Factors Analyze Any industry also including life insurance industry are effecting by the external environment. The change of external environment cause by external factors is bound to have effect on the performance of life insurance company and lead to the change of the company's solvency. 44. 1 Macroeconomic Factor The effect of macroeconomic factors on solvency of life insurance company can be taken into consideration from following aspects.

With the well development of macroeconomic, the demand of life insurance and the yield of investment held by life insurance company will increase, which lead to good effect on solvency.

However, the rapid expansion of economy also causes the increase of inflation rate and nominal interest rate, which result in bad effect on solvency. With the economic recession, the cash flow of life insurance company will be affected. Firstly, the demand of insurance will decrease caused by economic recession. Secondly, in the bad economic condition, the number of surrender will increase that result in poor situation f cash flow.

4.

. 2 Interest Rate Interest rate not only can affect the cash flow through change life insurance products' sale and surrender, but also influence the future value of investment and future cash flow. Interest rate can be divided into short-term interest rate and long-term interest rate and they have different effect on solvency of life insurance company. Short-term interest rate influences the solvency mainly by affecting the value life insurance company.

The fluctuation of interest rate may cause the mismatching of asset and liability of life insurance company because the time limit of asset and liability are different.

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