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Management of Commissions to Meet the Regulatory Requirements: Evidence from Property-Casualty Insurance in China

Wang, K., Fang, L. and Cheng, J. (2020). Management of Commissions to Meet the Regulatory Requirements: Evidence from Property-Casualty Insurance in China. Geneva Papers on Risk and Insurance - Issues and Practice, doi: 10.1057/s41288-020-00161-y

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 showed 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 increase the combined ratios 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 jeopardizing the compliance with other regulatory requirements.

Publication Type: Article
Additional Information: This is a post-peer-review, pre-copyedit version of an article published in Geneva Papers on Risk and Insurance. The definitive publisher-authenticated version Wang, K., Fang, L. and Cheng, J. (2020). Management of Commissions to Meet the Regulatory Requirements: Evidence from Property-Casualty Insurance in China. Geneva Papers on Risk and Insurance - Issues and Practice, is available online at: https://doi.org/10.1057/s41288-020-00161-y
Publisher Keywords: New Enterprise Accounting Code, Chinese Property-Casualty Insurance Industry, Insurance Regulatory Requirements, Earnings Management, Combined Ratio, Commissions
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Departments: Business School > Actuarial Science & Insurance
Date Deposited: 21 Apr 2020 14:30
URI: https://openaccess.city.ac.uk/id/eprint/24061
[img] Text - Accepted Version
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