According to the “Insurance Law”, insurance companies are divided into property insurance companies, life insurance companies, and reinsurance companies. A property insurance contract is an insurance contract with property and its related interests as the object of insurance. A life insurance contract is an insurance contract in which the life and body of a person are the subjects of insurance. Property insurance business, including property loss insurance, liability insurance, credit insurance, and other insurance businesses; life insurance business, including life insurance, health insurance, accident insurance, and other insurance businesses. The same insurer may not concurrently operate a property insurance business and personal insurance business; however, an insurance company operating a property insurance business may operate a short-term health insurance business and accident insurance business upon approval by the insurance regulatory authority. Reinsurance companies operate the reinsurance business, including ceding and ceding insurance.
Looking at the development history of the entire credit rating system, the credit rating of insurance companies is far behind the bond rating, but in the past 20 years, the rating of insurance companies has gradually attracted people’s attention. In recent years, with the Chinese government and enterprises issuing bonds to raise funds in the international market, credit rating has become more and more influential in my country. By international practice, the timely introduction of credit rating into my country’s insurance industry will help promote the mature and standardized development of my country’s insurance industry. have an important role.
The nature and characteristics of insurance companies will vary greatly depending on the types of risks underwritten, operating markets, and regulatory environments. Therefore, it is not appropriate to use a constant and unified model to evaluate whether an insurance company is a solvent. We believe that smaller companies do not always get lower tiers just because they are small. However, all other things being equal, it is easier for larger companies to obtain higher grades. When we carry out the credit rating of insurance companies, we first analyze whether the past operating performance truly and comprehensively reflects the company’s status, and then analyze which factors may change significantly in the future, and what impact these changes will have on the operating performance, because we believe that If there are no major changes in external factors and internal structure, the company will follow the historical development track. Therefore, assuming that past data are reliable, it is most important to analyze the factors that affect the company’s future changes and the strength of their effects. The conclusion we want to get is: “Is this company sufficiently solvent?”.
The credit evaluation of an insurance company is a comprehensive evaluation of the insurance company’s ability and willingness to perform its contracts.
The basic content of credit rating of insurance companies:
(1) Industry analysis
The operating risks of insurance companies take a long time to emerge, and insurance risks are more difficult to identify. The liabilities on the balance sheet of insurance companies are completely different from general manufacturing companies or trading companies, and also from general financial institutions (such as banks, securities companies, etc.). The liabilities of manufacturing companies or trading companies or financial institutions such as banks and securities companies are mainly represented by borrowings, accounts payable or deposits, etc., while insurance companies mainly exist in the form of liability reserves, and their calculation is also quite complicated.
On the whole, my country’s insurance industry has great potential for development, but domestic residents’ awareness of insurance is not strong, the competition in the industry is not standardized, and foreign insurance companies are watching and delaying. In the future, my country’s insurance companies will face huge opportunities and challenges. The analysis of the industry focuses on the research on the main aspects affecting the development of the insurance industry, such as the market size, market area, development prospects, innovation and development of insurance varieties, market competition Characteristics and competition focus, and main risk characteristics of my country’s insurance industry. Industry analysis is the basis for the credit rating of insurance companies.
(2) Supervision and policy analysis
Since 1995, the “Insurance Law” has been promulgated and implemented, and the principle of separate business operation of the property and life insurance has been established. Subsequently, the China Insurance Regulatory Commission was established, insurance companies were decoupled from administrative affiliates, the insurance market was cleaned up and rectified, and the external environment of the insurance market changed. Since 1997, the continuous reduction of interest rates by the central bank has had a significant impact on the operation of insurance companies. Some long-established insurers have suffered severe spread losses due to the large number of high predetermined rate policies they held before the rate cut, while some newer insurers have been spared. In 1999, upon approval by the State Council, the China Insurance Regulatory Commission conditionally opened up the securities investment fund market and the high-grade bond market to insurance companies, opening up new investment channels for insurance companies, and to a certain extent, helping to resolve the insurance company’s interest margin losses. risk. The entry and exit policies and supervision of insurance companies, the innovation policies and supervision of insurance varieties, and the financial and actual supervision of insurance companies are all important factors affecting insurance companies. In addition to the above major issues, we will also focus on changes in fiscal policy, monetary policy, and insurance regulatory policies and their impact on companies. Because a country’s fiscal policy will determine tax treatment, while monetary policy will affect interest rates and exchange (3) Reliability
of information Insurance companies are risk management companies, and their business development and risk management capabilities determine the financial strength of insurance companies. The first is the basic framework and system of risk management. Who will govern the behavior of the company’s board of directors and managers? Are these constraints valid?
To analyze the past operating performance of the company, we need historical data from the insurance company for the past 3 to 5 years. These include financial accounting data, actuarial reports, related important business management data, work plans, summary data, etc. Typically, we do not perform the duties of auditors and actuaries, which means we do not audit financial reports and do not have actuarial reports. However, we will pay attention to the professional qualifications, professional reputation, professional experience, and professional constraints of auditors and actuaries, etc. Based on this, we will make a judgment on the quality of their accounting information and actuarial information, and decide whether we will further verify the relevant information. In addition, we will also evaluate the reliability of the company’s information through on-site investigations and interviews with relevant middle and senior managers, public materials reported by the media, and business materials and plan summary materials provided by the company. To assess the reliability of the information, we need to understand the following issues: information disclosure and format requirements; availability and timing of annual reports; accounting regulations; the extraction and use of reserves; and the life tables used.
(4) Financial stability
Whether an insurance company can truly undertake insurance liabilities and perform insurance obligations will depend on the size of its solvency, which to a large extent depends on the company’s financial strength. We usually use the following methods to analyze the company’s past operating performance. One is to use common financial analysis indicators of insurance companies, and the other is to compare and analyze domestic competitors in the same industry.
When conducting financial analysis of insurance companies, we pay special attention to whether the reserves withdrawn are sufficient and appropriate, because there is a positive and negative relationship between the reserves withdrawn and the company’s profitability. The reserves withdrawn are too low, which is equivalent to underestimating liabilities and overestimating profits, resulting in the company’s cash flowing out of the company through taxes, dividends, bonuses, etc., creating an illusion of prosperity for policyholders; on the contrary, if the reserves withdrawn are too high, It can have a tax avoidance effect, which may be a good thing for policyholders, but it will reduce the company’s profitability, reduce its attractiveness to shareholders, and is not conducive to the company’s development in the long run. Therefore, we believe that it is more beneficial to balance the relationship between the company, shareholders, and policyholders by making appropriate reserves by fully estimating the risks of the policy (eg, risks that have occurred but have not yet been reported). Through the analysis and evaluation of past performance, we can find the main strengths and weaknesses of the company and their respective changing trends.
(5) Business development and risk management
Whether the company has enough qualified personnel to ensure the correct implementation of the company’s system if the company has developed a sound system. Is one person in control of the company’s decision-making or is there a variety of talents in one management team? What is the composition of the board of directors? Are managers strategists? Is there a formal decision analysis process? Is there an internal audit system? What is the role and effectiveness of the computer?
system ? is the company’s business strategy? Are there specific implementation plans for these strategies? How does it actually work? How does the company’s business strategy fit into its underwriting risk profile? Has there been any change in the company’s strategy? Does the organizational structure fit the strategic needs? Know the strategies used by other opponents? The business strategy is the driving force of the company’s development, and to ensure that it reflects the changes in the business environment, management needs to conduct continuous research. The source of competitive advantage is to establish an evolving strategy that cannot be easily ripped off by competitors.
The third is whether The underwriting business is competitive, what is its risk profile, and whether it is sufficiently diversified: what is the core business? What are the main insurance products and what is the profit situation? How is the business diversified, by geography, customer or risk? How is the sales channel? Does the company control the marketing system? What are the market share and competitive advantage? We believe that a company’s core business must be profitable, the insurance business must not lose money, and it cannot be supported by income from other businesses most of the time. Equally, the growing volume of new business is very important, as it makes the probability of risk more stable, making the risks the company faces more predictable and manageable. We are particularly concerned about the company’s ability to handle business risks in the context of inflation and deflation.
Fourth, how are the company’s asset quality and its investment risk control? How has the company managed and used policyholder funds in the past? Investment principles and management, asset portfolio and its quality; whether assets and liabilities match; investment yield; cash flow; liquidity; sensitivity of net assets to market price fluctuations of equity investments. Will they be able to manage better in the future?
Fifth is the risk of the reinsurance business. Proper use of reinsurance products requires careful planning and understanding of potential underwriting risks. We want to analyze whether the company has identified this risk and whether it has grasped the maturity of these risky policies. Our main concern: Is the company’s reinsurance program viable? What is the financial strength of the reinsurance companies involved? Are the company and the reinsurer a reciprocal relationship based on past performance? Are reinsurance costs and reinsurance volumes acceptable? If an insurance company’s reinsurance business volume exceeds a certain percentage, the solvency of the reinsurer should be considered in the rating.
(6) Shareholders and share capital
The strength, identity, and financial status of the company’s shareholders, the relationship between the company and the shareholders, the company’s autonomy, and the shareholders’ investment strategies will all be considered. If corporate shareholders lack strength, they are likely to emphasize the company’s short-term returns, and they may fall short during difficult times; conversely, corporate shareholders may pursue long-term returns and may focus on improving the company’s management. In our analysis, we look at substantial past shareholder support and commitment to future support.
The company’s share capital is the most basic guarantee for the company to carry out business and bear risks. The company’s paid-in capital can support the company’s business development to a certain extent. As the business expands further, the company must increase capital accordingly. The channels for increasing capital are: using the company’s surplus accumulation; expanding fundraising to old shareholders; attracting investment from new shareholders. The accumulation of corporate earnings is affected by the dividend policy. The level of historical dividends is important for judging a company’s dividend policy. The capital structure and ownership nature of an insurance company and the nature of the company all affect the dividend policy.