Environmental Pollution Liability Insurance Pricing and the Solvency of Insurance Companies in China: Based on the Black–Scholes Model

Shuai Chen and Jiameng Yang ()
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Shuai Chen: Business School, University of Shanghai for Science and Technology, Shanghai 200093, China
Jiameng Yang: College of Economics and Management, Nanjing Forestry University, Nanjing 210037, China

IJERPH, 2023, vol. 20, issue 2, 1-21

Abstract: Environmental pollution liability insurance is becoming increasingly important for China to achieve its emission reduction targets. Insurance pricing is a crucial factor restricting the market share of environment pollution liability insurance, from the perspective of the Black–Scholes pricing model, which in turn has influenced the solvency of insurance companies in China. Firstly, this study analyzes the problems existing in compulsory liability insurance for environmental pollution in China. It proceeds with analyzing the price of compulsory environmental pollution liability insurance using the Black–Scholes pricing model, and derives a high premium insurance rate of 2.44%. Moreover, it performs a multivariate regression analysis using the asset and liability data, taken from the annual report, to identify three key factors affecting the solvency adequacy ratio, namely, capital debt ratio, reflecting the company asset structure; net interest rate on assets, reflecting the asset scale with actual solvency; and claim ratio, reflecting the business quality. Based on the results of regression analysis and robustness test for the China Insurance Clauses (CIC) company, People’s Insurance Company of China (PICC), and Asia-Pacific Property & Casualty Insurance (API) company, it is shown that the effect of total asset, total debt, capital debt ratio, claim ratio, and net interest rate on assets on the solvency adequacy ratio is significant, with respect to the size of the coefficients. Based on the Black–Scholes pricing model found in the previous cycle of liability insurance, and keeping in view the existing problems of environmental pollution liability insurance expenditure, this paper presents suggestions that are conducive to improving the solvency of insurance companies in China.

Keywords: environmental pollution liability insurance; pricing; solvency; insurance company; Black–Scholes model (search for similar items in EconPapers)
JEL-codes: I I1 I3 Q Q5 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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