Abstract
We investigate how the 2009 regulatory change to the method of calculating combined ratios in the Chinese property–casualty insurance industry affected the relationship between commissions and combined ratios. We find that since the 2009 reform, the industry has shown a non-linear relationship between commissions and combined ratios. The relationship is negative (positive) when the combined ratio is higher (lower) than the regulatory threshold. Before 2009, this relationship was linear. Since 2009, when commissions increased, the combined ratio converges to the threshold. As the volatility of the combined ratio is positively related to the statutory capital required, this change provides incentives for insurers to decrease the combined ratio and/or its volatility as they seek to manage their commissions to approximate the threshold without jeopardising compliance with other regulatory requirements.
| Original language | English |
|---|---|
| Pages (from-to) | 508-534 |
| Number of pages | 27 |
| Journal | The Geneva Papers on Risk and Insurance : Issues and Practice |
| Volume | 45 |
| Issue number | 3 |
| Early online date | 17 Feb 2020 |
| DOIs | |
| Publication status | Published - Jul 2020 |
Funding
We benefitted from the discussions with and comments from seminar participants at the second Shanghai Risk Forum. Jiang Cheng acknowledges the financial support from National Natural Science Foundation of China (Grant No. 71573164).
Keywords
- New Enterprise Accounting Code
- Chinese Property-Casualty Insurance Industry
- Insurance Regulatory Requirements
- Earnings Management
- Combined Ratio
- Commissions
- Chinese property–casualty insurance industry
- Combined ratio
- Earnings management
- Insurance regulatory requirements