Life insurance company financial risk management strategy

Author: Hiroshi Yoshide
Publisher:
Publish Date: 2003-12-01
Features: This book is the 1999 research outcome of the "Life Insurance Financial Risk Research Society," which was established within the Life Insurance Culture Research Institute. It follows the 1998 research publication, the translated work Financial Risk Management Strategy (co-authored by Philippe Jorion and Sarkis J. Khoury professors at the University of California, published by Toyo Keizai Newspaper Publishing). The research society gathers scholars, researchers, and industry experts to study the financial risks and risk management strategies of life insurance companies from the perspectives of both researchers and industry professionals. The book was completed through collaborative discussions.
Japan is renowned as the "Kingdom of Life Insurance," leading the world in research and practice in the life insurance field. However, in recent years, prolonged ultra-low interest rates have posed severe challenges to the operations of Japanese life insurance companies, with some already facing bankruptcy. The root cause lies in the failure to predict changes in the financial environment closely related to life insurance operations—specifically, insufficient understanding and management of financial risks. This has resulted in the investment yield, which depends on the overall financial environment and is crucial for life insurance companies, failing to meet predetermined targets, leading to significant asset-liability mismatches. How to address unpredictable investment yields and yield gaps? This book, produced by the "Japan Life Insurance Financial Risk Research Society," gathers scholars, researchers, and industry experts to study the financial risks and risk management strategies of life insurance companies, drawing on past research and completed through collaborative discussions.
The book is divided into three parts, focusing on "Life Insurance Companies and Financial Risks," examining financial risks faced by the Japanese life insurance industry and its management strategies from aspects such as asset-liability management, individual assets, and organizational and operational systems.
Part 1: Asset-Liability Risk Management. Based on the interest rate risk arising from asset-liability mismatches, this section studies the comprehensive management of life insurance products (including external funding) on the liability side and asset allocation on the asset side.
Part 2: Asset Risk Management. To implement asset-liability management, it is necessary to address direct financial risks arising from asset allocation, including credit risk, price fluctuation risk, and exchange rate risk. Overall, these risks can be mitigated through asset matching, following the principle of diversified investment.
Part 3: Operational and Organizational Financial Risks. For individual life insurance companies, the issue lies in the corporate structure and the organizational model of the risk management system. To prevent financial risks from leading to operational bankruptcy, it is essential to establish safety nets such as payment guarantee funds and solvency regulations.
China's insurance industry started later, and both theoretical research and operational practice still need continuous learning from others. The experience and lessons of Japan's insurance industry will be highly beneficial for its Chinese counterparts. Additionally, the specialized research and practical insights into long-term asset allocation in annuities and investment advisory services will also provide valuable references.