Proposal for a New Solvency Index for Life Insurance Companies - Detection of Insolvent Companies at an Early Stage by means of Adjusted Basic Profit and Solvency CI

In light of the experience gained from seven insolvencies out of 40 life insurance companies in Japan, this research paper proposes a new approach to the prior detection of insolvent life insurance companies since such detection is considered difficult only with the risk-based capital method (hereinafter referred to as the "RBC method"), the world' s mainstream soundness criteria. The Solvency II, new framework to supervise the soundness being studied by the EU, takes the Basel II Capital Accord as the basic concept and emphasizes the following three points: (1) quantitative capital requirements consisting of the minimum capital and target capital; (2) identification of insurance companies that take high risks in terms of financial and organizational situation and monitoring them by supervisory authorities; and (3) market discipline by promotion of disclosure. However, merely an extension of the RBC method does not make the points (2) and (3) fully functional because of the difficulties in continuous monitoring, in judgment by market participants, and others. The soundness index developed this time puts importance on the life insurance company' s primary profit, that is, the transition of the income statements, while the RBC method is based on the balance sheet and risk factors. This index is designed to identify, in advance and from various angles, the phase where the soundness risk of life insurance companies is likely to come to the surface and to detect an individual company with a high probability of insolvency, using the "Adjusted Basic Profit," "Solvency CI," etc. described afterwards.