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Management of commissions to meet the regulatory requirements: the case of property–casualty insurance in China

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Listed:
  • Kai Wang

    (Anhui Agricultural University)

  • Lei Fang

    (Cass Business School, City, University of London)

  • Jiang Cheng

    (Lingnan University)

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.

Suggested Citation

  • Kai Wang & Lei Fang & Jiang Cheng, 2020. "Management of commissions to meet the regulatory requirements: the case of property–casualty insurance in China," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 45(3), pages 508-534, July.
    • Handle: RePEc:pal:gpprii:v:45:y:2020:i:3:d:10.1057_s41288-020-00161-y
    DOI: 10.1057/s41288-020-00161-y
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    References listed on IDEAS

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