The Choice of Premium Regulation Modes and Their Effects in China: Evidence from Auto Insurance Market

Fang Lei, Su Fang

Journal of Finance and Economics Vol. 42, Issue 04, pp. 112 - 122 (2016)  DOI:10.16538/j.cnki.jfe.2016.04.011

Abstract

Insurance supervision in China develops into a mode of opening up the front end and controlling the back end, and the voice of the marketization reform of premiums is always high. From a perspective of auto insurance occupying the largest market share in property insurance market, this paper analyzes the relationship between the marketization of premiums and the rationality of premium rates based on a sample from 2001 to 2004. It arrives at the conclusions as follows:the real premium rates are much lower than the theoretical premium rates in the automobile insurance market; the strict degree of premium rates regulation actually can influence the rationality of premium rates, and premium rates in the moderate regulation mode are the most rational. It further studies the effect of the rationality of premium rates on solvency and shows that the volatility of differences in premium rates indirectly affects solvency through net profits. Smaller volatility of differences in premium rates results in higher-level net profits and stronger solvency ability, so supervision system of premium rates should be selected carefully. It suggests that insurance market in China should adopt moderate supervision system of premium rates and completely opening-up marketization of premium rates seems to be a little radical, not suitable for current situation. Therefore, it could make premium rates more rational, and also would not affect the solvency of insurance companies, thereby leading to more healthy and stable development of insurance market.

Keywords

marketization of premiums; rationality of premium rates; solvency