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Research of Optimal Capital Size of Property and Casualty Insurance Company Based on Multi-objective Planning

Author WangLiZhen
Tutor LiXiuFang
School Nankai University
Course Insurance
Keywords multi-objective planning optimal capital size capital management property and casualty insurance company
Type PhD thesis
Year 2012
Downloads 30
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With the improvement of economic and financial environment, China’sinsurance industry is facing a stage of rapid growth. Owing to the specialcharacteristic of insurance and the large scale of premium, insurance industryappears a surge of capital increase, in order that the companies can have enoughcapital to satisfy their own development aims, the requirment of regulators andrating organizations. Under this condition, all the insurance companies muststrengthen the capital management, improve the utilization efficiency of capital,better off the capital allocation. The importmance is that, companies need to seek thefinancing channels, plan for financing in advance to prenvent themselves fromfalling into insolvency. Because capital management is a complicated systemsengineering, so insurance companies must analyse on the whole to realize theobjectives which are mutual independent, incompatible, complementary. Based onthe analysis of the current capital management conditions, this paper combines thecapital management theory with the multi-objective planning models to improve theability of capital management.This paper includes seven chapters. The structure and content are as follows.Chapter one is introduction. It introduces the background and meaning of thewhole paper, and summarizes the insurance capital theory of present situation. Basedon this, we give a whole research framework and research approach of the paper.Finally, we point out the innovation points and deficiency.Chapter two is about the capital management theory and the state of China’sinsurance industry. Capital theory experiences a long-run development. On the basisof generalizing the theory foundation, we mainly study the present situation ofinsurance in China. Using the panel data of34property&casualty insurancecompanies, this paper conducts the three-stage least squares procedure to estmate asimultaneous equations model in order to determine the relationship between therisk and capital and their influence factors. The result shows that the increase of capital makes companies have the ability to undertake much more risk, but thechange of risk in a limited extent may not cause capital raising pressure. Theincrease of premium is the main factor leading to capital requirement. We also findthat companies with solvency change thire capital and risk faster than companieswith insolvency. The results imply that, although it is not an efficient method toraise capital to ensure the solvency and development in the long run, insurancecompanies must seek financing channel and raise capital as soon as possible tomaintain normal development and gain time for the companies to change theirobjective from scale to benefit. So the companies all face an important problems thathow to determine the optimal capital.Chapter three is concerning insurance companies’property of multi-objectiveand the theory of multi-objective planning theory. The ultimate objective ofinsurance company is maximizing the value of themselves, but among theirdevelopment, there exists many sub-objectives, including company size, operatingprofit, the return of capital, risk control, supervising restraint and so on. Thisproperty of multi-objective causes the company should be managed from differentangles. Then this charter discusses the theory of multi-objective planning, andpresents the method of solving multi-objective models.Chapter four is asset allocation and optimal capital size of insurance companybased on multi-objective planning. Aimed at the value added maximum, financialdistress costs minimum, and investment risk minimum objectives, the charterconstruct a multi-objective programming model limited by underwriting risk andsupervision restraint. We first use the operation data to get the Copula functions,then we generate random loss data to setup parameter in case to solve the model.The research focuses mainly on the influence of the different weights, ideal points,and expected goals. The results show that this model can realize a lot of objectives,and also can improve the present situation of operation and management. At thesame time, it is favourable towards the sustainable development of insurancecompanies.Chapter five is optimal capital size with multi-objectives and multi-stagesmodel. This chapter sets up value added and capital cost as the main objectives, and builds up a multi-objectives model with a constaint of supervision and bankrupt. Weget the optimal capital and based on this, we extent the model to multi-stages. Theresults implys that, apart from premium, net asset, ruturn on investment, the optimalcapital also influence by the loss quantile determined by the rate of friction cost andfinancial distress cost. This model can effectively guide the companies to improvethe purposiveness and planning of raising capital.Chapter six is applied analysis of capital optimal size model. This chapterfirstly axamines the rationality of the model, and then analyze the change ofdifferent operation indexes to give capital management stratrgy aimed to differentstages. The last part is the limitations and the matter need attention of the models.The last chapter is conclusions.

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