Asset Structure and Solvency of Insurance Companies in China with Path Identification Model

Bing Xu; Lingling Pan; Jingwen Yang

doi:10.20965/jaciii.2015.p0465

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JACIII Vol.19 No.3 pp. 465-473

doi: 10.20965/jaciii.2015.p0465

(2015)

Paper:

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Asset Structure and Solvency of Insurance Companies in China with Path Identification Model

Bing Xu, Lingling Pan, and Jingwen Yang

Research Institute of Econometrics and Statistics, Zhejiang Gongshang University
18 XueZheng Road, Xiasha University Town, Hangzhou 310018, China

Received:

January 1, 1970

Accepted:

March 23, 2015

Published:

May 20, 2015

Keywords:

path identification, distribution shift, weighted-kernel density, risk exposure, solvency

Abstract

Based on weighted kernel density estimation and the nonparametric path identification model, this paper explores the impact of asset structure on solvency and risk exposure by insurance companies. To test the differences in solvency and risk exposure of admitted assets under stock and time deposit investment paths, we compared distributions under different investment paths to benchmark distribution. Our results suggest that both stock and time deposit investment impact positively on solvency, meaning that, all other things being equal, solvency increases when investment assets are expanded but risk increases simultaneously. The impact of stock investment is also greater than that of time deposit investment. The extent of these differences increased gradually over the year under the stock investment path, but reduced under the time deposit investment. Under the stock investment path, the value of the high quantiles of the distribution are likely to shift from that of low quantiles. Expected value and risk exposure under time deposit investment are not necessarily reduced, so regulators should both emphasize solvency indicators in daily supervision and also take into account changes in the investment structure, improve how admissible assets are calculated in case the insurance company increases the solvency margin by expanding high-risk investment.

Cite this article as:

B. Xu, L. Pan, and J. Yang, “Asset Structure and Solvency of Insurance Companies in China with Path Identification Model,” J. Adv. Comput. Intell. Intell. Inform., Vol.19 No.3, pp. 465-473, 2015.

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References

[1] C. Campagne, “Minimum Standard of Solvency for Insurance Firms-Report of the Ad Hoc Working Party on Minimum Standards of Solvency,” OEEC, TP/AS, 1961.
[2] B. Li, Y. Zhang, and J. Wang, “Study on minimum capital requirement for general insurance,” Insurance Studies, No. 3, pp. 47-54, 2013.
[3] J. S. Trieschmann and G. E. Pinches, “A multivariate model for predicting financially distressed P-L insurers,” J. of Risk and Insurance, pp. 327-338, 1973.
[4] S. E. Harrington, and J. M. Nelson, “A regression-based methodology for solvency surveillance in the property-liability insurance industry,” The J. of Risk and Insurance, Vol.53, No.4, pp. 583-605, 1986.
[5] J. D. Cummins and D. W. Sommer, “Capital and risk in property-liability insurance markets,” J. of Banking & Finance, Vol.20, No.6, pp. 1069-1092, 1996.
[6] C. Lu, X. Zhou and J. Yang, “A positive research on china insurance company insolvency,” J. of Finance and Economics, No. 10, pp. 80-91, 2006.
[7] P. L. Brockett, W. Cooper, L. Golden, and U. Pitaktong, “A neural network method for obtaining an early warning of insurer insolvency,” J. of Risk and Insurance, Vol.61, No.3, pp. 402-424, 1994.
[8] S. H. Hsiao and T. J. Whang, “A study of financial insolvency prediction model for life insurers,” Expert Systems with Applications, Vol.36, No.3, pp. 6100-6107, 2009.
[9] I. Albarran, J. Marin, and P. Alonso, “Why using a general model in Solvency II is not a good idea:An explanation from a Bayesian point of view,” Statistics and Econometrics Series, Vol.29, pp. 11-37, 2011.
[10] M. F. Grace, S. E. Harrington, and R. Klein, “Risk-based capital and solvency screening in property-liability insurance: hypotheses and empirical test,” J. of Risk and Insurance, Vol.65, No.2, pp. 213-243, 1998.
[11] J. Wang, X. Ma and J. Chen, “Theory on strengthening the solvency supervision of the insurance,” Insurance Studies, No.8. pp. 1115-1118, 1998.
[12] F. Su and Z. Yu, “Design of the actual assets recognition ratio of the insurance company,” Shanghai Finance, No.5, pp. 34-36, 2001.
[13] M. Eling, H. Schmeiser, and J.Schmit, “The Solvency II process: Overview and critical analysis,” Risk Management and Insurance Review, Vol.10, No.1, pp. 69-85, 2007.
[14] J. D. Cummins, S. E. Harrington, and R. Klein, “Insolvency experience, risk based capital and prompt corrective action in property-liability insurance,” J. of Banking & Finance, Vol.19, No.3, pp. 511-527, 1995.
[15] S. W. Pottier and D. W. Sommer, “Life insurer risk-based capital measures,” J. of Insurance Regulation, Vol.16, No.2, pp. 179-196, 1997.
[16] T. Du, “An empirical analysis based on dynamic financial analysis on the profitability of China’s general insurance industry,” Southwestern University of Finance and Economics, 2012.

This article is published under a Creative Commons Attribution-NoDerivatives 4.0 Internationa License.

[1] [1] C. Campagne, “Minimum Standard of Solvency for Insurance Firms-Report of the Ad Hoc Working Party on Minimum Standards of Solvency,” OEEC, TP/AS, 1961.

[2] [2] B. Li, Y. Zhang, and J. Wang, “Study on minimum capital requirement for general insurance,” Insurance Studies, No. 3, pp. 47-54, 2013.

[3] [3] J. S. Trieschmann and G. E. Pinches, “A multivariate model for predicting financially distressed P-L insurers,” J. of Risk and Insurance, pp. 327-338, 1973.

[4] [4] S. E. Harrington, and J. M. Nelson, “A regression-based methodology for solvency surveillance in the property-liability insurance industry,” The J. of Risk and Insurance, Vol.53, No.4, pp. 583-605, 1986.

[5] [5] J. D. Cummins and D. W. Sommer, “Capital and risk in property-liability insurance markets,” J. of Banking & Finance, Vol.20, No.6, pp. 1069-1092, 1996.

[6] [6] C. Lu, X. Zhou and J. Yang, “A positive research on china insurance company insolvency,” J. of Finance and Economics, No. 10, pp. 80-91, 2006.

[7] [7] P. L. Brockett, W. Cooper, L. Golden, and U. Pitaktong, “A neural network method for obtaining an early warning of insurer insolvency,” J. of Risk and Insurance, Vol.61, No.3, pp. 402-424, 1994.

[8] [8] S. H. Hsiao and T. J. Whang, “A study of financial insolvency prediction model for life insurers,” Expert Systems with Applications, Vol.36, No.3, pp. 6100-6107, 2009.

[9] [9] I. Albarran, J. Marin, and P. Alonso, “Why using a general model in Solvency II is not a good idea:An explanation from a Bayesian point of view,” Statistics and Econometrics Series, Vol.29, pp. 11-37, 2011.

[10] [10] M. F. Grace, S. E. Harrington, and R. Klein, “Risk-based capital and solvency screening in property-liability insurance: hypotheses and empirical test,” J. of Risk and Insurance, Vol.65, No.2, pp. 213-243, 1998.

[11] [11] J. Wang, X. Ma and J. Chen, “Theory on strengthening the solvency supervision of the insurance,” Insurance Studies, No.8. pp. 1115-1118, 1998.

[12] [12] F. Su and Z. Yu, “Design of the actual assets recognition ratio of the insurance company,” Shanghai Finance, No.5, pp. 34-36, 2001.

[13] [13] M. Eling, H. Schmeiser, and J.Schmit, “The Solvency II process: Overview and critical analysis,” Risk Management and Insurance Review, Vol.10, No.1, pp. 69-85, 2007.

[14] [14] J. D. Cummins, S. E. Harrington, and R. Klein, “Insolvency experience, risk based capital and prompt corrective action in property-liability insurance,” J. of Banking & Finance, Vol.19, No.3, pp. 511-527, 1995.

[15] [15] S. W. Pottier and D. W. Sommer, “Life insurer risk-based capital measures,” J. of Insurance Regulation, Vol.16, No.2, pp. 179-196, 1997.

[16] [16] T. Du, “An empirical analysis based on dynamic financial analysis on the profitability of China’s general insurance industry,” Southwestern University of Finance and Economics, 2012.