Management Review

›› 2019, Vol. 31 ›› Issue (10): 36-49.

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Research on the Minimum Capital Requirements and Asset Allocation of Life Insurance Companies: Based on the Perspective of Market Risk

Zheng Sujin1,2, Zheng Min2, Li Wei1   

  1. 1. School of Insurance, Central University of Finance and Economics, Beijing 100081;
    2. China Institute of Actuarial Science, Central University of Finance and Economics, Beijing 100081
  • Received:2018-09-12 Online:2019-10-28 Published:2019-11-05

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Abstract:

This paper optimizes a life insurance company's asset allocation within the framework of the classical Markowitz portfolio theory when the company need adhere to market risk capital requirements of China Risk Oriented Solvency System(C-ROSS). On the basis of simplifying the risk profile of assets held by a life insurer, this paper firstly solves a quadratic optimization problem to obtain the efficient frontier with budget, short-sale and investment constraints, and then calculates minimum capital requirements of different portfolios under both Standard Formula and Internal Model respectively. Finally, this paper analyzes the asset allocation and solvency status of efficient portfolios with an exogenous variable of the equity ratio. The result shows that under the C-ROSS Standard Formula, duration gaps between assets and liabilities have a clear and positive impact on the minimum capital requirement of the market risk. Therefore, reducing duration gaps and strengthening asset-liability matching become an effective way to release redundant capital. Compared with the Standard Formula, the Internal Model can describe the diversification effect and the trade-off between risk and return, so it will motivate life insurers to conduct a more active way of asset management and improve the interest spread level.

Key words: market risk, minimum capital requirement, Standard Formula, Internal Model, two-dimensional normal distribution