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

Kai Wang (), Lei Fang () and Jiang Cheng ()
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Kai Wang: Anhui Agricultural University
Lei Fang: Cass Business School, City, University of London
Jiang Cheng: Lingnan University

The Geneva Papers on Risk and Insurance - Issues and Practice, 2020, vol. 45, issue 3, No 6, 508-534

Abstract: 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.

Keywords: New Enterprise Accounting Code; Chinese property–casualty insurance industry; Insurance regulatory requirements; Earnings management; Combined ratio; Commissions (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1057/s41288-020-00161-y

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