On the Risk and Prevention of Chinese Insurance Capital Investment in Stock Market

Abstract：The entry of insurance capital to the stock market， on one hand， greatly improves the earning of insurance capital； on the other hand， there are also potentially greater investment risks， which can be regarded as coexistence of advantages and disadvantages to the development of insurance field. Clear awareness of the risks of insurance capital investment in stock market helps to avoid the risks to the greatest extent and to ensure the stable development of stock enterprises. This thesis analyzes in detail the risks faced by China's insurance capital in the stock market and puts forward specific preventive strategies.

Key words： Insurance capital investment； stock market； investment risks； preventive strategies

As people’s insurance consciousness keeps increasing， the insurance industry capital runs in a good state. The insurance enterprises deposited their capital into banks as investment for a long time in the past， but the earning of this kind of investment is respectively low and is not conducive to the development of the insurance industry itself. A series of policies were introduced and they have pushed insurance capital entering the stock market， providing a new investment channel of higher earning for insurance enterprise. While higher earning comes with higher risks， if the risk can not be accurately measured and avoided， it is likely to cause a serious blow to the related insurance companies and become a barrier for other insurance companies to enter the stock market， so it is rather necessary to be aware of the risks of China’s insurance capital investment into the stock market and work out corresponding preventive measures.

1.Analysis on the risks of China’s insurance capital into the stock market

The entry of insurance capital to the stock market is of great significance to theinsurance industry itself and the development of China’s stock market. The introduction and implementation of relevant national policies provides convenient conditions for the operation of insurance capital into the stock market， but there is also certain insurance risks unavoidably， which can be analyzed from both systematic risk and non-systematic risk：

1.1 Systematic risk

Change in market pricescauses risk， and this is the most common systematic risk. In the stock market， the securities index is mainly used to represent the price risk. In the course of securities trading， the par value does not determine the price， so it is unstable and uncertain. This character is the source of insurance capital investment risk and also the source of high earning.

The purchasing power risk is also called inflation risk. The purchasing power of financial assets changes as the overall price changes. For ordinary ticket buyers， in the event of severe inflation， the earning of the stock issuing company increases， the stock price rises， the dividend payment increases， and the earning of the ordinary investors increases. But the difference between insurance capital and average capital is very big， the main performance is the huge amount in investment. Under the circumstance of inflation， the huge stock purchasing power may influence the stock price and cause investment risk.

Interest rate risk is credit risk. On one hand， interest rate change will influence the price of securities； on the other hand， interest rate change will product influence on the company’s operation. There will be price change to the stock of insurance capital investment as interest rate changes， which will reduce the stock investment earning. In case that the insurance product is priced low and the expected interest rate is used， the insurance company will be unable or unable to fully fulfill the obligation of insurance payment.

Liquidity rick is also called liquidation rick. Once insurance capital is put into the stock market， it is no longer in the form of cash and it is in the form of securities. But there is great difference between securities and case. In the course of liquidation， there is a need to touch transaction cost. Moreover， when conducting liquidation， thecurrent economic cycle of insurance companies and the supply and demand situation of securities market need taking into consideration. In case that the market has little demand for securities， it will increase the difficulty of liquidation， which will easily cause economic losses.

Foreign exchange risk， changes in exchange rates between domestic and foreign currencies are likely to result in changes in the earning of securities investment. Investment of foreign currencies is a common form of investment at present. When an insurance company invests in marketable financial securities issued in the form of foreign currency， it needs bear both the risk equal to the investment in local currency and the risk occurring when exchanging currencies upon change in exchange rate.

1.2 Non-systematic risk

Financial risk. Listed companies realize financing in the ways of issuing stocks， bonds and bank loans and so on， while bonds and bank loans both belong to enterprise debts which require enterprises to pay interest on time and also to pay the fixed interest for the preferred stock on time as scheduled. The smaller the proportion of the money required to pay is， the better the financial situation is， and the less financial risk there will be. On the contrary， when the proportion of the money paid on time in the company’s overall finance is large， insurance capital investors shall think it over because there might be large financial risk to be borne.

Management risk， it is mainly considered from two aspects： operation decision and operation. To analyze from the aspect of operation decision， in the current complicated market competition environment， if decision-maker of enterprises fail to recognize the current market situation and make wrong operation decisions， there will be bad operation， which will lead to huge risk to enterprises. If investment exclusively concentrates on a certain product or a certain market， it will lead to risk simplification. Making a wrong decision for a major operation decision will make the enterprise suffer huge economic losses， increasing investment risks； to further analyze in the aspect of business operation， if there are loopholes in the rules and regulations and a disconnect in the work process， investment risks will be increased.

Risk of default. If securities issuers fail to pay securities interest or dividendinterest periodically， or fail to return principal as scheduled will both bring risks to investors. Moreover， such default of securities issuers will make investors lose trust to towards them. The market will be followed by the stock gunner and fall of securities prices， resulting in a sharp decline in stock prices. In addition， there is ethical risk. If the related stock companies falsify their statements or materials， or intentionally conceals some information related to bad management， which may both cause huge losses to the stock investors.

2.Preventive strategies for risks of China’s insurance capital investment in the stock market

The entry of insurance capital to the stock market represents that China’s insurance industry has entered a new stage of development. The entry of old age insurance capital to the stock market brings bring new vigor undoubtedly to the stock market， and also brings huger investment return for insurance enterprises. However， the cycle of the entry of insurance capital to the stock market is still not stable and there is an inevitable risk of investment. Thus insurance enterprises shall carefully identify investment risks and specify strategies to deal with risks ahead of time：

First of all， the operation products and service objects of insurance enterprises are special， so their ability to bear any risk and loss is weaker. Experience has shown that if insurance capital wants to control the mismatch risk of insurance investment into the market while taking the stable income into account， it is necessary to establish a sound pressure test mechanism of dynamic matching of assets and liabilities. For example， pressure tests are necessary under the circumstances in which the investment balance of the predetermined income product of property insurance occupies a certain proportion in the total assets at the end of last quarter， the net cash flow of insurance companies changes from positive to negative， and the repayment ability of insurance companies declines and so on， so as to guarantee the matching of liabilities and assets and to control the risks of insurance investment.

Secondly， to establish a reasonable matching model of investment time limit and cost benefit. Since the introduction of the related policies， many insurance enterprises have showed interest in stock investment， making a boom of banners of insurancecapital appear. But there are certain insurance risks behind the boom. Thus China Insurance Regulatory Commission work out a series of rules and regulations exclusive for the use of insurance capital. In the aspect of investment， it prefers to invest equity， real estate and other assets not easy to liquidate. However， the development of China’s stock market and insurance market at present has not yet entered a perfect period. In order to reduce the cost of debt， insurance companies choose wrong matching. Therefore， when putting insurance capital into investment， it is necessary to establish a model to match the investment cycle with the final return. The pre-warning indicators are created through repeated tests to control the active mismatch behavior and reduce the use risks.

Investors of insurance capital shall form joint venture with listed companies. Owing to the larger fluctuation of the stock market at present， in case insurance enterprises show banners improperly， what follows is huge risk and corresponding economic loss. Thus avoidance of this risk is the problem that insurance enterprises must face and solve. This requires insurance companies to make rational analysis according to their current development situation in order to show banners properly and rationally and to carry out operation activities together with the related stock companies and to reduce the fluctuations of secondary market on their own investment impact. The combination of insurance investment banner and the listed company needs a process. On in this way can the difference between the internal structures of the two companies be discovered and solved carefully and be gradually combined， which is also better at coping with the changing market environment.

Before showing banners to the listed companies， in case that the listed companies are found to be exposed to operational problems， insurance companies need to launch emergency plans in time to avoid risks.

Before showing banners， insurance enterprises need to carry out comprehensive and rigorous evaluation to target companies， to consider the listed companies as a good development partners of their own from the perspective of concept， but also need to give full trust to the listed companies. After completing showing banners， good communication shall be maintained for the business activities of the relevantenterprises， but too much intervention shall not be given to the development decisions of the companies. Insurance enterprises also need to assign special departments and personnel to supervise the development of the listed companies so as to ensure both parties’ sharing resources and good development and to increase or decrease stocks by focusing on the stock market volatility and combining with the actual situation. Before showing banners to the listed companies， in case of any fight for equity， management power arise in the listed companies， insurance enterprises need to figure out methods to mitigate and to safeguard the interest of both parties， and to help the listed companies work out schemes adapting to the market development environment.

3.Conclusion

To sum up， under the circumstance of the changing market environment， the entry of insurance capital to the stock market can bring new vitality for the development of China's stock market， also can make insurance companies gain greater interest. But what can not be denied is that， there are advantages and disadvantages in the entry of insurance capital to the stock market because the development of the stock market is still immature. Insurance companies need to keep in good communication with the listed enterprises， distinguish the risks in the stock market， actively carry out methods and measures， and ensure the security of insurance capital and stability of earning.

references：

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About the Author：

Yankang Jiang （1994-）， male， Han nationality， Leizhou， Guangdong， MBA， research direction： financial investment.